Global securities regulators don't know what to think about high-frequency traders as a debate rages about whether they are harmful to markets, but watchdogs are clearly concerned that HFTs may be tilting markets.
HFTs are in focus because there's concern among some investors that their super-fast trading may be unfair, and leading to strange movements in securities -- most notably the flash crash.
In a new consultation paper, the International Organization of Securities Commissions lays out what it knows about high frequency traders, and the upshot is not much -- but the regulatory body is voicing some significant concerns. Chief among them is that the technological advantage of high-frequency traders gives them an unfair edge, causing other investors to drop out of markets, and whether their speed and sophistication make it too hard for regulators to ensure they aren't gaming markets.
"Although the technological advantage might decline in the future as technology often becomes commoditised, a challenge posed by HFT is the need to understand whether HFT firms’ superior trading capabilities result in an unfair advantage over other market participants, such that the overall fairness and integrity of the market are put at risk," said IOSCO, whose members include Canada's securities commissions.
The regulatory body added that "many trading strategies used by HFT participants are so sophisticated that they raise an issue as to whether market authorities have the necessary resources to conduct effective market surveillance."
Given the uncertainty, it's unlikely that any tough new rules on HFTs are coming anytime soon.
"What is less clear is the extent of these risks in practice and what regulatory action should be prioritised," IOSCO said.
The problem is it's hard to gather evidence on just what HFTs are doing, and how it affects a dynamic, constantly moving market that also has other factors at play. The result is IOSCO has too many unanswered questions.
Do traders using ultra-fast computers to trade at lightspeed help or hurt liquidity? Not enough evidence to say.
"The available evidence fails to find a consistent and significant negative effect of HFT on liquidity," the report says. "Further research and a more consolidated body of evidence is necessary to assess the real impact of HFT on liquidity."
It's the same for volatility, and the degree of influence on such events as the flash crash.
"A clear understanding of the degree by which HFT firms may exacerbate the transmission of shocks across markets is still lacking."
Do they practise abusive trading strategies? Again, not enough evidence.
"During panel hearings, IOSCO was not presented with clear evidence of the systematic and widespread use of abusive practices by those engaging in HFT. Hence HFT and market manipulation should be kept as two distinct concepts and should not be automatically equated."
IOSCO is hoping to answer some of the questions it has in a public commentary period over the next six weeks.