Michael Brolley receives SSHRC Insight Development Grant

Michael Brolley has received a $53,242 Insight Development Grant over two years from the Social Sciences and Humanities Research Council (SSHRC). His agenda focuses on how investor welfare and financial information dissemination has been impacted by the market-wide adoption of high-speed computing technology by financial institutions and exchanges to participate in, and facilitate securities trading.

Improved access allows investors to construct algorithms that can react to market data before human investors are able to react. The use of this technology, known as high-frequency trading (HFT), has grown the extent that the TABB consultancy group estimates their participation in 73% of all daily stock trades. Their strong presence in equity markets has led to concern over their impact on overall market quality, both on their ability to squeeze out “natural investors”, as well as the ability of exchanges to facilitate trades at these speeds. The opinions and research into this impact are mixed. As a recent example, the Investment Industry Regulatory Organization of Canada (IIROC) released a report on the results of their highly publicized ‘HOT study’ on Dec. 9, 2015. Their conclusions suggest that HFTs improve market liquidity and contribute to accurate securities prices (price discovery) in Canada.

In January of 2016, Northwestern business Professor Philip Kotler’s article for the Huffington Post provided a case for taxing securities transactions by suggesting that “Hopefully the financial trading tax will discourage high frequency trading which tends to increase volatility and destabilize financial markets”, a popular view that maintains, even in light of IIROC’s HOT study. Michael’s project explores the impact of high-frequency trading from both the investor and exchange angle, with a focus on the role that HFT plays in the dissemination of information throughout financial markets.

The first stage of Michael’s research agenda examines the impact of a popular modification to order processing at some exchanges: the use of a ''speed bump’’, whereby liquidity-taking orders are slowed down before they reach the exchange. The goal of this project is to theoretically provide an assessment of the efficacy of a speed bump through its impact on investor welfare (via trading costs), and price efficiency (via information acquisition). The second stage focuses on investment by exchanges in order-processing technology by competing markets to answer the question: does competition lead to over-investment in processing technology by exchanges? 

Thanks to support from Michael’s SSHRC grant, his research agenda has provided research opportunities for undergraduate and graduate students at Laurier, and expanded access for Laurier students and faculty to the New York Stock Exchange Trade and Quote data set, benefitting researchers across Laurier.