There is no link between high-frequency trading (HFT) and market manipulation, according to research from Australia's Capital Markets Cooperative Research Centre (CMCRC).
Regulators on both sides of the Atlantic have had their sights trained on HFT ever since the 6 May 2010 flash crash. Last month European parliamentarians voted in favour of a crackdown on the practice as part of MiFID II.
However, the CMCRC research, based on five years' worth of data - from 2006 to 2011 - from the London Stock Exchange and Euronext Paris, has found that the much-maligned HFT does not correlate with an increase in market abuse.
During the five year period covered by the report, there was a considerable increase in the HFT proxy on the LSE and Euronext Paris markets.
There was also a statistically significant negative correlation between the HFT proxy and end-of-day price dislocation alerts - which is a proxy for market manipulation - for both markets, suggesting more high-frequency trading actually equals less market abuse.
The report initially found a correlation between HFT and 'ticking' - incidences of one-share executions moving prices - but this disappeared when the data was controlled for variations in volume and volatility. This may suggest, says the CMCRC, that some of the ticking being blamed on HFT is in fact just a feature of normal market activity.
Professor Alex Frino, CEO, CMCRC, says that despite intense interest in HFT and algo trading since the flash crash, there still remains a lack of empirical research directly examining their effect on market quality and integrity.
"In an environment of such low returns, everyone is going to be looking for a scapegoat. However HFT and its relationship to market fabric is very complex, and needs to be analysed as such before any conclusions can be drawn. It's not good enough just to have an opinion, when regulations are being drawn up that will affect the way markets work around the world," says Frino.
The CMCRC report on market manipulation was commissioned by the Bank of England for the Foresight project on HFT. The final Foresight working paper, which brought together 35 academics from nine countries, found fault with several planks of the EC's planned regulatory changes.