Upheaval in UK stock market seen as no improvement

* UK vs Spain shows UK no more efficient -CA Cheuvreux study

* UK trade volumes up 5 times vs Spain 2 times post-Mifid

* Increased UK liquidity has not changed market outcomes

By Jane Baird

LONDON, April 26 (BestGrowthStock) – A rise in competition and high-frequency
trading in the British stock market in recent years has done nothing to improve
price efficiency, according to brokerage CA Cheuvreux.

Regulators are beginning to ask questions about high-frequency trading and
need to understand what these structural changes mean for the market, said
Charles-Albert Lehalle, head of quantitative research for CA Cheuvreux, Credit
Agricole Group’s (CAGR.PA: ) European equity broker.

“For sure we can say that the change in market structure does not improve
market efficiency,” he said.

The share of high-frequency traders has grown to as much as 50 percent of
trading in some European markets since the EU’s markets in financial instruments
directive (Mifid) in 2007 paved the way for new, low-cost trading platforms.

Such traders, including big market makers such as Getco and Citadel, use
computer algorithms to trade rapidly in and out of stocks to capture minute
changes in prices.

Most market experts say these new entrants have helped Europe’s markets by
increasing trade volume and liquidity.

The increased liquidity from high-frequency trading, however, is not being
used to increase investment but instead to connect the multiple trading venues
that have arisen after Mifid, Lehalle said.

For example, if an investor now wants to sell a block of stock, the
high-frequency market-maker will buy and then quickly sell it in another venue
to another high-frequency trader, until the trade eventually finds its way to a
final longer-term buyer.

More trades are needed for the same outcome, because they are serving to
connect different pools of liquidity, he said.

Investors also need to realize that even though there appears to be more
liquidity in the post-Mifid market, they are just as vulnerable to volatile
price swings and should continue to be cautious in their trading strategies, he


Lehalle based his conclusions on a study comparing trading in the benchmark
indexes in the UK to Spain, which has so far effectively blocked implementation
of Mifid.

The London Stock Exchange’s (LSE.L: ) share of trading in FTSE 100 stocks has
dropped to around 53 percent, in stark contrast to Mercado Continuo (BME.MC: )
exchange’s 98.6 percent share in Spain’s IBEX 35, according to Thomson Reuters

Mifid and the rise in high-frequency trading have led to a five-fold jump in
the number of trades in Britain compared to early 2007 before Mifid kicked in,
CA Cheuvreux found.

For the IBEX 35 over the same period the daily average number of trades is
about twice as high.

Increased liquidity is frequently held up as a panacea, promoting
efficiency, making the market less vulnerable to short-term price changes and
allowing a more accurate reflection of investors’ views on the underlying risks
in stocks.

CA Cheuvreux compared intraday volatility, however, and found no evidence
that the UK market was working any better than the Spanish market.

The UK spreads between bid and ask prices have narrowed, but the size of
trades has declined as well, Lehalle said.

“If trade size were stable and bid/ask spreads were narrowing, then it would
show that the market is more efficient. But if both are decreasing, then it is
difficult to make any conclusion about efficiency.”

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(Editing by Rupert Winchester)

Upheaval in UK stock market seen as no improvement