By Michelle Price

Independent research shows that high-frequency trading has a positive impact on global capital markets by increasing liquidity and reducing price volatility, findings that could allay some of the popular and political concerns over the strategy.

The research, published Monday by the Capital Markets Cooperative Research Centre, based in Australia, counters arguments from critics, who say the practice causes volatility and increases systemic risk.

Alex Frino, professor of finance and chief executive of the research group, said high-frequency trading "may actually play a role in decreasing excessive price volatility."

He added: "Part of this function is the way [high-frequency trading] algorithms identify trading opportunities—they're built to recognize when prices are abnormally high or low, and their response to this naturally pushes prices back towards equilibrium."

High-frequency trading is a form of super-fast and sophisticated trading that uses quantitative strategies to execute trades in a fraction of a second and, in some cases, to exploit tiny price discrepancies across platforms.

However, the practice has many critics, including a raft of policy makers.

Paul Myners, the former City of London minister, has launched an attack on high frequency and other forms of "black box" trading, which he blamed for the surge in share price volatility seen in recent weeks. According to reports, Lord Myners said high-frequency trading appears "detached from the true function of capital markets" and is "potentially fraught with hazard".

Regulators globally also are poised to clamp down on the practice. In July, the European Securities and Markets Authority, the new pan-European financial regulator, surprised the market with a fast-track plan to govern high-frequency trading.

High-frequency trading has come to play a critical role in U.S. and European markets and now accounts for almost 40% of European trading volumes, according to research from consultancy Aite Group.

Further research published by Tabb Group in January found that the strategy can account for up to 77% of turnover on some U.K. markets.Defenders of high-frequency trading have long argued that the automated market-making and arbitrage strategies the firms deploy add liquidity to the market, reduce spreads and make trading more efficient.

Mr. Frino's findings, although not comprehensive, seem to partly vindicate this position. They form part of a broader global academic study being conducted by Mr. Frino and his team into the impact of this type of trading on liquidity and volatility.

Mr. Frino's research was based on analysis of market data provided by the London Stock Exchange, Euronext Paris, the Australian Securities Exchange, Nasdaq OMX and the Singapore Exchange.

Further research examining the impact of high-frequency trading during times of market stress will be published in coming weeks.

By Michelle Pricehttp://professional.wsj.com/article/SB40001424053111903392904576512250007216020.html
Independent research shows that high-frequency trading has a positive impact on global capital markets by increasing liquidity and reducing price volatility, findings that could allay some of the popular and political concerns over the strategy.

The research, published Monday by the Capital Markets Cooperative Research Centre, based in Australia, counters arguments from critics, who say the practice causes volatility and increases systemic risk.
Alex Frino, professor of finance and chief executive of the research group, said high-frequency trading "may actually play a role in decreasing excessive price volatility."
He added: "Part of this function is the way [high-frequency trading] algorithms identify trading opportunities—they're built to recognize when prices are abnormally high or low, and their response to this naturally pushes prices back towards equilibrium."

High-frequency trading is a form of super-fast and sophisticated trading that uses quantitative strategies to execute trades in a fraction of a second and, in some cases, to exploit tiny price discrepancies across platforms.
However, the practice has many critics, including a raft of policy makers.
Paul Myners, the former City of London minister, has launched an attack on high frequency and other forms of "black box" trading, which he blamed for the surge in share price volatility seen in recent weeks. According to reports, Lord Myners said high-frequency trading appears "detached from the true function of capital markets" and is "potentially fraught with hazard".
Regulators globally also are poised to clamp down on the practice. In July, the European Securities and Markets Authority, the new pan-European financial regulator, surprised the market with a fast-track plan to govern high-frequency trading.

High-frequency trading has come to play a critical role in U.S. and European markets and now accounts for almost 40% of European trading volumes, according to research from consultancy Aite Group.
Further research published by Tabb Group in January found that the strategy can account for up to 77% of turnover on some U.K. markets.Defenders of high-frequency trading have long argued that the automated market-making and arbitrage strategies the firms deploy add liquidity to the market, reduce spreads and make trading more efficient.
Mr. Frino's findings, although not comprehensive, seem to partly vindicate this position. They form part of a broader global academic study being conducted by Mr. Frino and his team into the impact of this type of trading on liquidity and volatility.

Mr. Frino's research was based on analysis of market data provided by the London Stock Exchange, Euronext Paris, the Australian Securities Exchange, Nasdaq OMX and the Singapore Exchange.
Further research examining the impact of high-frequency trading during times of market stress will be published in coming weeks.