The first phase of a new study into high-frequency trading in Canada finds that 11% of traders are embarking on this sort of trading, which accounts for less than a quarter of the trading volume, but over 40% of the trades, and the vast majority of message traffic on Canadian markets.

The Investment Industry Regulatory Organization of Canada (IIROC) Wednesday published the first two parts of a three-part study that aims to examine high-frequency trading (HFT) in the Canadian equity markets. IIROC notes that there is both concern about the possible impact of HFT, and support for it.

Advocates for HFT say it results in enhanced liquidity, reduced spreads and greater market efficiency, it notes; whereas critics say it exacerbates market volatility by withdrawing liquidity when most needed, takes unfair advantage of ‘real’ investors, contributes confusion and cost through excess message traffic, and undermines investor confidence. Yet, despite these opinions, there is not even an accepted definition of what constitutes HFT, it says.

The IIROC study doesn’t attempt to define HFT precisely either. Rather, it examines the activities of so-called high order-to-trade (HOT) traders — which are traders who were responsible for a high number of orders, compared to the number of trades they actually completed. It then offers a detailed, statistical analysis of their activity.

The next phase of the study will more closely examine the effects of their trading on market quality and integrity from multiple perspectives, such as liquidity, price formation, volatility and overall market confidence. IIROC says this will help Canadian and global regulators and market participants better understand the nature and impact of HFT.

The portion of the study released Wednesday looks at all trading activity on exchanges and most alternative trading systems in Canada from August 1 to October 31, 2011. It finds that, in that period, so-called HOT traders accounted for 22% of trading volume, 32% of dollar value, 42% of trades, and 94% of all order messages sent; despite the fact that they represent just 11% of user IDs.

It also found that they trade 36% of all Canadian share volume traded in US inter-listed securities; and, 60% of all Canadian trading in ETFs and ETNs.

The study also concluded that HOT users trade more in the dark than in lit markets; that they trade anonymously more often than other market participants; and, that they trade passively approximately 66% of the time.

Additionally, it found that over 90% of their activity comes through seven IIROC dealers, and that 23% of their volume is with the same broker. The HOT users also earned $250,000 more per day in rebates than they paid in fees, it found.

Moreover, the study found that 40% of HOT users were identified as direct market access (DMA) clients, and that these traders accounted for the majority of trading by all HOT users.

To facilitate the third phase of the study, IIROC also published for comment a proposed request for assistance (RFA) today, expressing its intent to seek help from interested outside parties, both academic and others, that have expertise in equity market structure, in order to complement its own internal analysis.

Once the final version of the RFA is issued, candidates will be given one month to submit proposals. And, after the successful candidates are selected, IIROC anticipates that the impact study will take eight to 10 months to complete, it said.

“This study leverages the rich set of consolidated regulatory data from IIROC’s real-time multi-market surveillance technology,” said Susan Wolburgh Jenah, IIROC’s president and CEO. “The results of this study will help to inform IIROC’s work with other Canadian regulators to determine the most appropriate response in the context of global regulatory developments.”