High-frequency trading: its volume and effect on financial market

The experts of the Bank of Russia have conducted a research to assess for the first time the number of high-frequency traders in the Russian financial market and their influence on its parameters.

This topic arouses interest primarily due to the increased role of high-frequency trading (HFT) in on-exchange trading in general. A significant share in the aggregate volume of trading in liquid instruments at the Moscow Exchange falls on high-frequency traders, which is comparable to advanced financial markets.

For the purpose of the research, the experts used information on organised trading in the most liquid financial instruments at the foreign exchange, stock and derivatives markets of the Moscow Exchange.

The results showed that HFT companies are active on-exchange trading participants and, in particular, important providers of available liquidity. Moreover, the research notes that HFT market participants are statistically more likely to quote financial instruments closer to the spread than their non-HFT peers, providing an additional evidence that HFT companies produce a positive effect on market liquidity.

Liquidity is one of the most important characteristics of market quality. Highly liquid markets with various groups of investors are much more resilient to attempts by a single person or a group of persons to affect the pricing processes and, therefore, are much less prone to artificial volatility.

At the same time, the research authors indicate that different HFT market participants demonstrate quite a diverse range of trading activities that can cause an opposite effect on the market.

The experts of the Bank of Russia will continue to study the results and processes through which high-frequency trading affects other market parameters.