The Investment Industry Regulatory Organization of Canada (IIROC) has announced the selection of a third project team to assess the impact of high-frequency trading (HFT) and related activity on Canadian equity markets as part of the final phase of its HFT study.
The team comprises two professors at renowned educational institutions in Chicago who have extensive experience studying, teaching and publishing reports about HFT, algorithmic trading and other market structure issues internationally. They are Dermot Murphy, assistant professor of finance at the University of Illinois at Chicago, and Robert Korajczyk, the Harry G. Guthmann Professor of Finance at the Kellogg School of Management, Northwestern University.
This team will examine the role of high-frequency traders as (non-designated) market makers in providing liquidity during periods of market stress, and how that compares to the liquidity offered by designated market makers and other traders during these periods. Because HFTs have no obligation to provide liquidity, it is unclear whether market stability is improved during stressful periods when liquidity is needed most.
In April 2014, the IIROC announced the selection of the first two project teams. All the teams will, as part of their research, have access to secure and “masked” data for the period of Jan. 1, 2012 to June 30, 2013. The IIROC expects to have the final phase of the three-part HFT study completed by the end of 2014.
“We believe it’s important to address identified regulatory concerns relating to HFT using empirical data and objective study to better understand its impact on market integrity and quality, as well as overall investor confidence,” says Susan Wolburgh Jenah, IIROC president and CEO. “This research, combined with IIROC’s ongoing work, will help to inform any further policy-making or regulatory interventions.”
This impact analysis is the third phase of the IIROC’s HFT study. It follows the publication of the first two phases of the study in December 2012, which objectively identified a study group of traders and offered a detailed, statistical analysis of their activity.
The IIROC says its HFT study will complement other initiatives already adopted by organizations to govern high-frequency and algorithmic trading. In particular, in 20I3, the IIROC issued guidance on manipulative and deceptive trading. Surveillance alerts have been implemented, and the IIROC is actively monitoring to detect these rule violations.