Following the US stock market Flash Crash in May 2010, the potential for abusive strategies in high-frequency and automated trading has been the subject of growing regulatory concern. Firms should be aware that increased regulation and scrutiny in this area is now in prospect.
In September, a Working Paper and sixteen supporting evidential papers were published. These were prepared by the Government Office for Science under the aegis of the UK Government's Foresight project to consider how computer generated trading in financial markets might evolve in the next ten years and at the impacts. The Working Paper suggests that there is so far no direct evidence that high frequency computer based trading has increased volatility and that much of what has transpired in markets has been beneficial: liquidity has been enhanced, transactions costs have been lowered, and market efficiency appears if not better, then certainly no worse. Some issues with respect to periodic illiquidity, new forms of manipulation, and potential threats to market stability due to errant algorithms or excessive message traffic, however, need be addressed and regulatory changes in practices and policies will be required. A final report is to be published in autumn 2012.
In October, a roundtable discussion amongst global regulators on market structures, hosted jointly by the FSA and US SEC, debated the positive and negative effects of high frequency trading, its impact on market liquidity and market efficiency, the potential for market abuse and the impact on long-term investors, and highlighted the need for global coordination on regulatory approaches to such trading. These concerns have also been reflected by the increasing focus of European, international, US and UK authorities.