High-frequency trading (HFT) technology does not heighten market volatility or open the door to increased market abuse, according to a government report out today.
The technique – which now accounts for a third of all UK equity trading – uses algorithms to make large numbers of trades and enables investors to profit from split-second moves in share prices.
Opponents say it can result in wild swings in share prices and destroys the relationship between investors and companies.
However Sir John Beddington, the government’s chief scientific adviser, concluded that HFT has improved liquidity in equity markets, reduced transaction costs for all investors, and led to more efficient pricing.
Despite this he said that “policy makers are justified in being concerned” about HFT’s ability to introduce instability for short periods of time, such as the 2010 Flash Crash when the Dow Jones fell 600 points in minutes.
Today’s report calls on European regulators to take swift evidence-based action, in addition to using new software-based methods that will allow greater surveillance of markets by regulators.
Sir John Beddington said: “There has been a relative lack of evidence and analysis to inform new regulations designed to increase market competition and protect consumers, and so this report provides clear advice on what regulatory measures might be most effective in addressing those concerns in the shorter term, while preserving the benefits that this technology may bring.”
Lord Myners, the former City minister, last night told City A.M. that misfiring algorithms should be a serious concern for market watchdogs.
“HFT, which effectively involves ownership of shares for a microsecond, is prone to technological risk. Regulators don’t have the competence in house to keep up the speed with the pace of technological change. My concern has always been whether the system is safe in the event of tech failure,” he said.
In a recent high-profile case, Wall Street broker Knight Capital lost $460m (£286m) in August after problems with its software led it to inadvertently purchase billions of dollars of shares.