“The Future of Computer Trading in Financial Markets – An International Perspective” – a report two years in the making by the Government’s Chief Scientific Adviser Sir John Beddington and published today (here is the BIS press release and the report is here) concludes 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, the report does make various recommendations in relation to HFT:
“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.”
the BIS press release.
More on HFT here.