The Capital Markets Cooperative Research Centre (CMCRC) has released two videos commenting on  the anti-HFT sentiment stirred up by the release of Michael Lewis’s new book Flash Boys.

CMCRC CEO Professor Michael Aitken, who has conducted multiple academic studies on HFT, said that there was no evidence presented in the coverage stimulated by the release of the book that securities markets are rigged. “Lewis says that just because computers work faster than humans, no-one is in a position to work out just what they are doing,” he said. “This is complete nonsense. Alongside trading systems we have been building surveillance systems which are capable, given the right information, of looking at orders in sub-microsecond intervals.”

Professor Aitken disagreed with Lewis’s claim that exchanges have been complicit in the ‘rigging’ of markets, pointing out that co-location offerings are designed to negate the latency advantage for any one participant. “Sure it costs a bit more money,” he said, “but the same story explains why individual investors went to mutual funds in the first place – because it cost too much to trade as an individual.”

Ill-conceived reactions to coverage of Lewis’s book on the part of market regulators present far more risk to retail investors than the alleged damage caused by HFT, Aitken says, including the risk of making trading more expensive for individuals. “The evidence I have collected is that ill-conceived attempts to impede high-frequency trading, will have a severe impact on liquidity, which will in turn raise the cost of trading for investors and the cost of capital for corporates.”

There are issues with high-frequency trading, but Lewis does not get at them, Aitken said. To address the concerns around HFT regulators need to ensure all orders in markets are tagged with client identifiers (as will be the case in Australia from October this year) before then reviewing the activity of each participant, identifying high-frequency players and investigating how and why orders are getting faster, if indeed they are doing so, and what impact this has on market fairness and efficiency.

“If orders are getting faster due to the reduction of risk and compliance checks, that is likely the most significant risk associated with some HFT players,” he said.

See Professor Aitken’s video on Flash Boys coverage here: https://www.youtube.com/watch?v=6HaLKZWWYAw&list=UUnyU9-4WAduJhlYOGTHTf3w

Professor Aitken has also produced a short video on HFT in the Asia-Pacific region, in which he stresses that the trading strategy is a far smaller issue in the region than many fear, and  that HFT is in fact still largely unexplored because of the way market data is organised.

“It’s impossible at the moment to make any definitive statements about the impact of HFT because trading data in most major markets in the world does not contain information on who’s trading” he said. “We can get a sense of this by looking at the order to trade ratio which tends to be higher in markets with higher HFT activity. As proxied by the order to trade ratio HFT is nothing like the ratio it is in other parts of the world.”

See Professor Aitken’s video on HFT in Asia-Pacific here: https://www.youtube.com/watch?v=s0KvafJptVA&list=UUnyU9-4WAduJhlYOGTHTf3w