Canadian stock markets may be entering a "new regime" as high frequency trading starts to show signs of shrinking its role in share trading, according to a new report from brokerage ITG Canada.
HFTs have been blamed for many ills in the market, from the flash crash to a general increase in trading costs for big institutions that have to trade against them. But there are signs that their influence may have peaked.
ITG's analysts point to indications such as a decline in the number of buy and sell orders that hit the markets just fractions of a second before disappearing, and a reduction in the blizzard of message traffic to stock markets.
"This quarter's analysis of message traffic data reveals changes in trading behaviour that may signal the begginings of a new regime," ITG's analysts wrote. "Improvements in our metric for the quality of order flow, combined with a decline in fleeting orders points to a structural change amongst HFT participants."
Why are HFTs backing away? Money.
Study author Doug Clark, a managing director at ITG, said that other markets are showing similar trends. That suggests that the business of high-frequency trading is so competitive that some players weren't making money.
Also, brokerage houses are doing a better job of offering clients algorithms and routers that handle trading in ways that combat high frequency traders and cut their profits.
To follow the impact of HFTs, ITG looks at the number of orders it takes to generate an actual trade. HFTs are known for sending and cancelling many orders as they try to seek out patterns in the market to trade against. In the final three months of last year, the number of orders per trade declined by 13 per cent.
Another signpost of HFTs is the number of what ITG calls "fleeting orders" -- orders that only exist for less than a second before they are withdrawn, changed or filled. "The percetnage of sub-second orders fell noticeably while the percentage of long lived orders (greater than 60 seconds) increased," ITG found.
Some of the biggest declines are on markets that are associated with HFT activity, such as Pure and Omega.
So what strategies aren't working for HFTs? There are signs that they have cut back on trading strategies that play exchange traded funds against their underlying constituents, according to ITG.