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U.K. Government Report Offers Even-Handed Analysis of HFTs
October 23, 2012
[ by Melanie Gretchen ]
High-frequency trading (HFT) could have positive effects on the functioning of financial markets, a government report found. Just as that view is on the other side of popular opinion, the report was released on the other side of the Atlantic by the U.K.
Culture Clash. Current wisdom holds that HFT, by placing orders at a microsecond pace to exploit tiny differences in share prices, has increased volatility and should be curbed or even banned. What the International Foresight Project found, commissioned by the British government’s Department for Business, Innovation, and Skills (BIS) may suggest – to quote Monty Python – "something completely different."
Considering that HFT represents about 30% of the U.K.’s equity trading and possibly over 60% in the U.S., the report's findings could be a game changer:
- "The key message is mixed. The project has found that some of the commonly held negative perceptions surrounding HFT are not supported by the available evidence and, indeed, that HFT may have modestly improved the functioning of markets in some respects." -- Sir John Beddington, chief scientific adviser to the British government, in the report.
- No direct evidence has been found for claims of market manipulation using HFT techniques, as reported by institutional investors such as pension funds and mutual funds in different countries
Sir Bedding conceded that "policy makers are justified in being concerned about the possible effects of HFT on instability in financial markets." To this end, the report recommends:
- more transparency and standardization in HFT trades
- globally coordinated instruments such as circuit breakers and a uniform tick size policy could regulate HFT, though these could be hard to implement and adds "two words of caution" to policy makers.
"Even if not backed by statistical evidence, these perceptions need to be taken seriously by policy makers. … High perceived levels of abuse may harm market liquidity and efficiency for all classes of traders." -- Sir Beddington.
For further details, go to [CNBC, 10/23/12].
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