High frequency trades improve markets, Bank experts argue

Tim Wallace
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HIGH frequency trades (HFT) help markets become more efficient by improving price discovery, Bank of England researchers argued yesterday, countering European politicians who argue the practice is dangerous and destabilising.

The paper argues that traders’ regular interactions in the market provide a stream of valuable information – a source that would diminish if HFT were banned.

It also found many HFTs improve liquidity in markets.

EU plans would see the traders forced to keep orders in the market for longer periods of time before cancellation, while commodities derivatives traders are set to face caps on their activities. Fees may also be increased for such traders.

Members of the European Parliament have also blamed HFTs for driving up the prices of food and energy, and want the practice banned. But the rules would need the backing of all EU nations before it could be implemented.

“HFTs trading is, overall, informationally more efficient than that of the rest of the traders in the sense that they have a higher ratio of information to noise contribution,” according to the working paper.

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