The harms done by high frequency traders are outweighed by the benefits of historically low trading costs, a CFA Institute study has shown.

Dr Svi Rosov, an analyst in the capital markets policy group at the CFA Institute, analysed trading and quote data from 150 large- and small-cap stocks from the US, UK and France on 48 days from 2010 to 2014.

His report, entitled Liquidity in equity markets: characteristics, dynamics, and implications for market quality, showed high frequency strategies were most evident in the US, but that there was no evidence of systematic liquidity duplication across all markets analysed.

At worst, he saw such strategies – by which traders front run a legitimate trade by purchasing and then selling a stock at a profit within microseconds – as discouraging participation on open markets, which may harm price discovery to the detriment of investors and the broader economy.

These findings were contrasted with the assertion that spreads on trades are at historically low levels in the US, UK and France, with US spreads as low as one tenth of their level in 1999 for both large and small caps.

Dr Rosov’s findings follow a study published by ASIC in October which found that current levels of high frequency trading are not adversely affecting the function of Australian markets for businesses and investors.

ASIC noted that some institutional investors are increasingly managing their own order flow and execution decisions so they can limit interaction with predatory traders and improve their trading outcomes.

Rosov said that the “relatively benign findings of ASIC’s review” could be explained by the less fragmented nature of the market outside the US.

Anthony Serhan, president of the CFA Society Sydney, said it was important for any investor to understand the full implications of this issue.

“The more we research and investigate such phenomena, the better our knowledge and competency in terms of making the right decisions around the funds that are entrusted to us, particularly at community level,” he said.

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