The FCA has published its Occasional Paper No. 16: “Are high-frequency traders anticipating the order flow? Cross-venue evidence from the UK market”.
The background to the report is that, according to the FCA, High-frequency traders (HFTs) have received a mixed reaction from academics and practitioners with some people underlining their role as liquidity providers and others highlighting the problems that they could bring to the market. A specific allegation that has been made is that by exploiting their speed advantage, HFTs can predict when orders are going to arrive at different trading venues and trade in advance of slower traders. Using order book data from the UK equity market, we investigated this specific allegation by looking for patterns compatible with HFTs anticipating the order flow of other participants on lit venues. We do not find evidence that HFTs systematically anticipate near-simultaneous marketable orders sent to different trading venues by pure non-HFTs. But when analysing longer time periods (measured in seconds or tens of seconds), we do find patterns consistent with HFTs anticipating the order flow of pure non-HFTs. However, we cannot say whether this is due to HFTs reacting more rapidly to new information, or to order-flow anticipation.
The FCA statement and the full report are available here.