On October 23, the Department for Business, Innovation and Skills published a report entitled ‘The Future of Computer Trading in Financial Markets – An International Perspective’. The report is an analysis of the potential benefits and risks of algorithm driven high-frequency trading, with a discussion of regulatory priorities for the future. The report finds that computer-based trading improves liquidity, reduces transaction costs and ensures that market prices are more efficient. In addition, the report found no direct evidence that high-frequency trading has increased either market volatility or market abuse.
However, the report did find that in specific circumstances, computer-based trading can lead to market instability and periodic illiquidity, and suggested that to address this policy-makers should consider the following priorities:
- Immediate evidence-based regulatory action at the European level to assess and introduce ways to manage the adverse side-effects of computer-based trading and incentivise accident-avoiding practices and behaviour.
- The implementation of accurate, high resolution, synchronised timestamps as a key means for assisting analysis of financial markets.
- The development of software for automated forensic analysis of adverse/extreme market events.