Bloomberg News

High-Frequency Trading No Threat to Stability, Sweden’s FSA Says

February 21, 2012

Feb. 21 (Bloomberg) -- High-frequency trading, under scrutiny from securities regulators globally, has had a minimal negative impact on the Swedish market and poses little threat to stability, the nation’s financial services watchdog said.

“The investigation shows that the negative effects related to high frequency and algorithmic trading are limited,” the Swedish Financial Supervisory Authority said today. “It is apparent that trading has undergone a transformation, and to some extent a deterioration, but most parties believe that this is due to multiple factors and not just faster, more computerized trading techniques.”

The role of high-frequency firms in periods of market swings has come under scrutiny since the May 6, 2010, crash that briefly erased $862 billion from the value of U.S. shares. Traders and other professional investors were said to have withdrawn bids as the selloff worsened, according to a September 2010 report from the Securities and Exchange Commission and the Commodity Futures Trading Commission. Regulators and exchanges later installed curbs to limit the disruption to markets.

In Europe, Financial Services Commissioner Michel Barnier last year proposed rules covering high-frequency trading as part of a wider overhaul of European Union market regulations, known as Mifid.

Automated Order Placement

High-frequency trading relies on the rapid and automated placement of orders, many of which are immediately updated or canceled, as part of strategies such as market making and statistical arbitrage and tactics based on momentum. Hedge funds, brokerages and trading firms use these techniques as part of investment strategies or to quickly execute orders as prices and available bids and offers change.

Algorithms, or strategies that execute bigger orders by breaking them into smaller pieces and sending them to different exchanges, also typically use high-frequency techniques. Mutual, pension and hedge funds employ algorithms built by brokers or vendors to automate their trading instead of manually placing orders in markets or turning to humans to buy or sell blocks.

“The higher degree of complexity and the technologically advanced environment can naturally create uncertainty on the market and, as a result, volatility can increase,” the Swedish regulator said today. “But the business models of firms conducting high-frequency trading -- i.e. to not carry any financial risk in their balance sheets -- means that the risk for contagion is small. There are greater risks, though, associated with other types of algorithmic trading in that poorly designed algorithms can create long-term consequences.”

Computerized Trading

A U.K. government study in September concluded that computerized trading isn’t spurring broad increases in market volatility even though it sometimes creates “instability” that may lead to crashes. The report, commissioned as part of the U.K. government’s Foresight Project on the future of computer trading in financial markets, aims to assess the “risks and benefits” of automated buying and selling.

Still, the Swedish regulator today said it will remain vigilant because investors said market abuse has become harder to spot and more widespread. Traders and investors “must focus on expanding their systems that monitor trading in real time and improving co-ordination between themselves to identify any market abuse,” Sweden’s FSA said.

--Editors: Will Hadfield, Andrew Rummer

To contact the reporters on this story: Janina Pfalzer in Stockholm at jpfalzer@bloomberg.net; Nandini Sukumar in London at nsukumar@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net


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