High-frequency trading activity in EU equity markets

The objective of this report is to shed further light on the extent of high-frequency trading (HFT) in EU equity markets. We use unique data collected by ESMA, covering a sample of 100 stocks from nine EU countries for May 2013. Our study complements the HFT literature by looking at equity markets across a number of EU countries. Most of the HFT studies published so far focus either on the US or on a single country within Europe.One of the challenges faced by empirical studies is the operational definition of HFT. There is a variety of approaches in the literature to estimate HFT activity. None of these approaches is able to exactly capture HFT activities and they lead to widely differing levels of HFT activity. This is an important issue for the analysis of HFT activity and its impacts. It is also a significant challenge for regulators who need to define what constitutes HFT activity. The approach taken in this report is to provide a lower and an upper bound for HFT activity.Two main approaches have been used in the literature: i) a direct approach based on the identification of HFT firms according to their primary business or the types of algorithms they use, and ii) an indirect approach based on statistics such as lifetime of orders or order-to-trade ratio. We provide estimations for HFT activity based on the primary business of firms (direct approach) and based on the lifetime of orders (indirect approach). The first proxy is an institution-based measure (each institution is either HFT or not), while the second proxy is a stock-based measure (an institution may be HFT for one stock but not for another one).The results based on the primary business of firms provide a lower bound for HFT activity, as they do not capture HFT activity by investment banks, whereas the results based on the lifetime of orders are likely to be an upper bound for HFT activity.