Swedish regulator starts investigation into robot traders

The Swedish Financial Supervisory Authority (Finansinspektionen) is to investigate ‘high frequency trading’ following complaints that it could facilitiate market manipulation.

The issue came to a head this past week when three asset managers wrote a joint letter published in newspaper Dagens Industri complaining that there was insufficient regulation in place, and raised the possibility that market manipulation was ongoing as a result, leading to poorer returns for investors including those in their own funds.

Per Börjesson of Spiltan Fonder, Georg Norberg of Granit Fonder, and Johan Thorén of Strand Fonder said the danger to investors stemmed from an aggregation of factors. Firstly, the volume of trading in equity funds has increased significantly. For example, they suggest that turnover in August this year was the equivalent of 6% of all Swedish fund investments. This increase in turnover means that there are more opportunities for traders uninterested in actual ownership of equity, but who simply wish to exploit high frequency trading on a higher volume of stocks being traded. The frequency of trading is facilitated by the use of so-called robot traders, computers that are plugged directly into the Stockholm stock exchange, and which are programmed to execute a series of high speed trades.

“There are signs that high frequency traders are partly focused on manipulating fund investor flows and boosting volatility in the market. This can lead to Swedish fund investors getting a lower price than deserved for their fund shares, and even make their purchases unnecessarily expensive,” the letter stated.

The three demanded an immediate investigation by regulators.

Yesterday, Finansinspektionen announced that it would start doing just that.

In a brief statement the regulator said: “FI is starting an investigation into high frequency trading in Sweden. The objective is to build a picture of how all actors in the market are affected by this trade, and high frequency trading’s possible contribution to increased volatility on the stock market. The investigation will be conducted through the autumn.”

In response to questions from InvestmentEurope for further details a spokesperson for FI said: “The investigation is meant to create a better and more encompassing knowledge base on how high frequency trading actually affects the market generally. From that we will naturally consider rule changes if we find issues on which we are not satisfied. We see before us also that the work will involve a number of [participants], of which EBM [Ekobrotssmyndigheten – the Swedish Economic Crime Authority] is most probably going to be one.”

The spokesperson added that there was little other information currently because the regulator was engaged in determining the internal processes and people required to run the investigation. He added that the investigation overall was likely to take most of the autumn to complete.

The debate seems already to be splitting the domestic funds industry.

Avanza, one of the better known fund platforms for Swedish retail investors reacted through a statement from its chief spokeperson, who said that the computerised trading strategies used to make gains from faster trading were not inherently “evil”.

However, commenting on the impact of the debate and the planned investigation, Pia Nilsson, chief executive of the Swedish Investment Fund Assocation (Fondbolagens förening) said in an emailed statement to InvestmentEurope that: “It is good that [FI] are looking at how [high frequency trading] affects trade, and if there are consequences for long term investors.”

Swedish news agency Tidningarnas Telegrambyrå (TT) reported today that the PPM funds platform for retirement savings experienced a record number of fund switches during August, as investors moved away from equity in favour of fixed interest. TT said assets in the PPM system have declined by SEK50bn (€ 5.5bn) since the start of 2011.

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