By now everyone knows that when it comes to the US stock market, only two things matter: i) will the NY Fed's Kevin Henry, ETF wizard extraordinaire, in conjunction with Citadel buy SPY 2% above the NBBO in the last second of trading [7]using his favorite SPY and ii) how much momentum will the USDJPY ignite in cross-asset HFT algos sending the S&P to daily all time highs. In other words, in the new normal the only thing that matters for US "risk" is the symbiosis between the central bank and the HFT industry, which now dominates virtually all markets with an iron fist.
But what about Europe: just how prevalent is HFT there. Now thanks to a new report by ESMA titled "High-frequency trading activity in EU equity markets [8]" we know: in the lifetime total of all orders, HFT accounts for 76% of all orders by, 49% of all trades and 43% of total value traded.
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.
In our sample, we observe that HFT activity account s for 24% of value traded for the HFT flag approach and 43% for the lifetime of orders approach. For the number of trades the corresponding numbers for HFT activity are 30% and 49%, and for the number of orders 58% and 76%. The difference in the results is mainly explained by HFT activity of investment banks which is captured under a lifetime of orders approach, but not under a HFT flag approach.
[9]
Which means that just like in the US, HFT will never be dethroned in Europe where the "value" of stocks is almost entirely in the hands of one Mario Draghi and a few million HFT algos.