The new two-year Foresight study, The Future of Computer Trading in Financial Markets – An International Perspective, aims to shed new light on technological advances which enable computer algorithms - rather than humans - to drive high-speed stock trades, and which have transformed market structures in recent years, attracting controversy in the process.
The report says that the evidence available suggests that computer-based trading has several beneficial effects on markets, notably: liquidity has improved, transaction costs have fallen for both retail and institutional traders, and market prices have become more efficient.
The study found no direct evidence that computer-based high frequency trading (HFT) has increased volatility in financial markets, nor evidence to suggest it has led to an increase in market abuse.
However, it says in specific circumstances computer-based trading can lead to market instability and periodic illiquidity, and policy-makers are right to consider measures to address this risk. The report suggests immediate priorities for action to limit future market disturbances, including:
- Immediate evidence-based regulatory action - European authorities working together with practitioners and academics should assess and introduce ways to manage the adverse side-effects of computer-based trading and incentivise accident-avoiding practices and behaviour.
- A larger role for standards - Implementation of accurate, high resolution, synchronised timestamps should be considered as a key means for helping analysis of financial markets.
- Better surveillance of financial markets - Through the development of software for automated forensic analysis of adverse/extreme market events.
- In the longer term more needs to be done to improve understanding of the effects of computer-based trading. The report suggests unlocking the power of the scientific community to play its role in addressing the considerable challenge of developing better evidence-based regulation.
Publishing the report, Professor Sir John Beddington said:
“Well-functioning financial markets are vital for everyone. They support business and growth across the world and provide important services for investors. This research provides evidence to policy-makers concerning the effect of HFT on financial markets, looking out to 2022.
“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.”
The independent and international study has involved 150 leading experts from more than 20 countries to provide in-depth analysis on computer trading to date.
Notes to editors
1. The full report ‘The Future of Computer Trading in Financial Markets – An International Perspective’ and evidence base is available at http://www.bis.gov.uk/foresight/our-work/projects/current-projects/computer-trading/reports-and-publications.
2. This Foresight project is sponsored by Her Majesty’s Treasury and details of the Lead Expert Group can be found at http://www.bis.gov.uk/foresight/our-work/projects/current-projects/computer-trading/lead-expert-group.
3. Full membership of the project’s High-Level Stakeholder Group is published on the Foresight website at http://www.bis.gov.uk/foresight/our-work/projects/current-projects/computer-trading/high-level-stakeholder-group.
4. High frequency trading (HFT) represents about 30 per cent of equity trading in the UK and possibly more than 60 per cent in the USA.
5. Foresight is in the Government Office for Science (GO-Science). GO-Science supports the Government’s Chief Scientific Adviser in ensuring that the Government has access to, and uses, the best science and engineering advice. It is located within BIS.
6. The UK Government's Foresight Programme helps Government think systematically about the future. Foresight uses the latest scientific and other evidence to provide advice for policymakers in addressing future challenges.