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First, it noted that big institutional investors were typically interested in executing large orders while minimising cost. "Detection of presence of large orders and anticipating its execution strategy has been raised as a potential issue that may increase the market impact cost of executing sizeable trades", it said.
However, it noted that, with lower market volumes overall, it can become more difficult to control for and minimise market impact for large orders. "Trading such orders more passively is possible but leads to longer execution times", it said. "This, in turn, implies greater timing risk and possibly loss of expected excess return."
NBIM also pointed out that a large number of orders and cancellations are sent in rapid succession in HFT strategies in an attempt to create false mid prices. "This undesirable behaviour may be designed to slow down market data and exploit stale prices at the expense of other market participants", it said. "While some of these phenomena are not new, their detection has become more challenging."
Finally, NBIM argued that the rise of high-frequency, low-latency trading strategies also raised potential issues of equal market access and market abuse. "For example", it said, "there are many statistical and structural arbitrage opportunities that depend on low-latency market access technology". "Immediate trade and quote data constitutes an informational advantage over other market participants, which can increase the probability of generating positive returns."
NBIM said that, on the one hand, these arbitrage strategies correct potential mispricing between correlated securities, improving price efficiency. On the other hand, HFT – which exploits the structural differences between venues (latency, fee structures, pricing models, order types) by increasing market complexity – may not necessarily add economic benefit to the market, it said.
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