High frequency traders using computers to flip stock in a fraction of a second may be generating as much as 42 per cent of all trades in Canadian stocks.
That number comes from a ground-breaking study by the Investment Industry Regulatory Organization of Canada (IIROC), which looked at a three-month period of 2011 and tried to isolate buying and selling that bore the hallmarks of high-frequency trading (HFT).
IIROC looked at market users who generated a very high number of orders for every consummated trade. That is a fingerprint left by HFT strategies.
The findings show that HFTs are indeed very busy in Canada and dominate trading in certain securities, such as exchange traded funds.
The stock trading world is riven by a debate over HFT, with much more rhetoric than fact driving the debate. Supporters point to benefits such as smaller spreads between bid and ask prices on stocks and the presence of ready HFT users willing to trade.
Skeptics say some HFTs are predators taking advantage of technology to gain an unfair advantage.
It's difficult to say who's right, because of a lack of credible data from unbiased sources. The IIROC figures are the first taste of a longer term study designed to offer some proof one way or the other.
Regulators are concerned that there's a perception that HFT is creating an unfair marketplace, which hurts confidence and threatens to drive away other investors who no longer believe they can compete.
"There's a lot of fear of the unknown," said Chris Sparrow, a consultant and market researcher. He was speaking on a panel about HFT at a Toronto conference sponsored by IIROC and the Ontario Securities Commission where the numbers were unveiled.
IIROC plans to expand the study to look at the effect of HFT on issues such as volatility, fairness, integrity and confidence.
But the first stage of the study involved simply trying to figure out how prevalent HFT is in Canada. Even that seemingly simple question has never been definitively answered.
IIROC found that those users showing telltale signs of HFT were the source of 22 per cent of Canadian trading by total volume, 32 per cent by value and 42 per cent by number of trades.
Those same users generated 94 per cent of all orders – most of which are cancelled a fraction of a second later as HFT users try to lure out other traders.
Most of the trading is concentrated in stocks with values over $1.
If you are trading an exchange traded fund there's a good chance that an HFT shop is on the other side – as more than half of those securities appear to be traded by HFT users.
The study, when complete, is likely to give Canada a better picture of its HFT situation than any other major capital market in the world.