HFT May Account for Three Quarters of European Equity Orders

In the first part of its extended study of HFT, however, the regulator has run into a common roadblock in its approach, and its estimates vary wildly as a result. One way it has measured HFT activity ─  for which it monitored 100 stocks across multiple venues during May 2013 ─ has been the "flag" approach, in which firms that identify as pure HFT are tracked. The other method is more indirect, and measures order-to-trade ratios, as well as the lifetime of orders.

The distinction between the two is critical. While the first approach incorporates many of the market-making firms that utilize algorithms for HFT, and identify as such, it fails to incorporate HFT activity from other entities, such as sell-side investment banks. The second is therefore stock-specific rather than firm-specific, in that a bank may trade in a high-frequency manner one one name, while trading at high speed on another, and not necessarily at high frequency.

Under the flag approach, Esma has determined that HFT activity factors in to 24 percent of value traded, 30 percent for the number of trades, and 58 percent for the number of orders.

However, when the definition of HFT is loosened, the numbers increase starkly as they take into account the activities of other firms.

Using this approach, HFT now accounts for 43 percent of value traded, 49 percent for the number of trades, and 76 percent for the number of orders, according to Esma's analysis.

The report simply analyzes HFT activity, without making any determinations as to the quality of liquidity that HFT provides, which it says it will investigate in future installments.

Reactions on social media were mixed, with Johannah Ladd, secretary general of the Futures Industry Association's European Principal Traders Association saying that the variation in results proved that too tight a definition of HFT by regulators is risky.

ESMA study shows how hard it is for regulators to define HFT: if def too tight, it omits hefty #HFT activity of banks http://t.co/1r5GF96lx5

— Johannah Ladd (@JohannahLadd) December 18, 2014

Others also reinforced the difficulties with defining HFT from a regulatory perspective, such as IMC Financial Markets MD Remco Lenterman, a prominent supporter of HFT on Twitter.

ESMA study shows how fruitless and foolish regulatory efforts are to define HFT http://t.co/76uk3ACq7y

— Remco Lenterman (@RemcoLenterman) December 18, 2014

Writing on Fidessa's Regulation Matters blog, the vendor's senior regulatory adviser, Christian Voigt, says that while the numbers make for punchy headlines, the underlying methods behind the determinations differ from those previously supplied by Esma.

"Under its requirement to provide technical advice to the European Commission to specify the definition of HFT, Esma proposed two different options in the Markets in Financial Instruments Directive II consultation paper; neither of those are applied in this particular study," he says. "With so many possible definitions, can Esma's most recent findings on the prevalence or otherwise of HFT have any practical meaning? Is it more a case of the results being driven by the underlying assumptions?"