High-frequency trading accounts for 77 percent of transactions in U.K. markets, according to a study by research firm Tabb Group LLC.
Orders from long-only funds that bet stocks will rise, hedge funds and retail investors account for 23 percent of activity in continuous markets, the group said in a report today. High-frequency trading, in which firms may transact thousands of times a second, accounts for the rest. The practice makes up 35 percent of the 3.9 trillion-euro ($5.3 trillion) U.K. turnover when over-the-counter transactions and other non-continuous trading is included, Tabb said.
Tabb’s data covers what it calls continuous markets where trades occur electronically, including venues where prices are publicly displayed and dark pools, where they aren’t. Over-the-counter trading, conducted away from exchanges and alternative systems, isn’t included, Tabb said. The U.K. makes up about 21 percent of all European trading, Tabb said.
“What the study shows is that so little of the continuous market is natural order flow,” Will Rhode, co-author of the report with Miranda Mizen, said in a phone interview. “It’s critical for pension funds to have alternative strategies to achieve best execution and alternative sources of liquidity which they trust.”
Rhode estimates there are between 35 and 40 independent high-frequency trading firms such as Getco LLC and Optiver operating in the U.K.
May 6 Crash
The U.S. Securities and Exchange Commission is examining potential new restrictions on high-frequency computerized trading after the May 6 crash that temporarily wiped out $862 billion of stock-market value in less than 20 minutes. The Financial Industry Regulatory Authority, which oversees brokers and their firms, is investigating manipulative activity that may rely on automated trading strategies.
In Europe, which hasn’t had a similar crash, the European Commission is seeking comment on whether it should set limits on the number of orders that high-frequency traders can place, and whether to require such traders to tell regulators how their computer algorithms work.