High-speed trades make up fifth of Canada market
By Jennifer Kwan
TORONTO (Reuters) - High-frequency trading, using lightning-fast algorithms to turn profits, represents a fifth of all activity on the Toronto Stock Exchange and other Canadian trading systems, according to data released by regulators.
Such trades, based on a strategy that floods the system with buy and sell orders without executing all of them, make up 11 percent of the overall Canadian market, preliminary data from the Investment Industry Regulatory Organization of Canada showed on Tuesday.
High-frequency trades account for 22 percent of share on a volume basis and 32 percent of the value traded, says IIROC, which studied trading patterns between August and October 2011. The trades represent 42 percent of the total number of trades executed on all Canadian trading systems.
High-frequency traders use sophisticated algorithms to trade thousands of shares in a millisecond with the aim of earning a profit from market-making and price imbalances.
Regulators around the globe became more concerned about high-frequency trading after the so-called "flash crash" on May 6, 2010, which caused stock markets to swing wildly in a matter of minutes. Regulators have said algorithms behind rapid-fire trading were a factor in the volatility but did not trigger it.
In the Canadian study, the regulator focused on high-frequency traders that use a strategy in which they enter significantly more orders relative to the number of trades that are actually executed. Such "noisy" users have a very high ratio of orders to trades.
IIROC said the study was intended to inform the ongoing debate over whether high-frequency trades are beneficial or harmful. Next year, it is expected to publish a broader report on the practice's potential impact on market liquidity, volatility, price discovery and related issues.
"IIROC has heard many arguments that the rapid entry and cancellation of orders creates an 'evaporating' or 'phantom' liquidity," said Victoria Pinnington, vice president of trading review and analysis at the self-regulatory body, in prepared remarks to an industry conference. Continued...