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Britain and France are considering a crackdown on the ultra-fast share trading that featured in May's “flash crash” on Wall Street, which alarmed regulators and investors globally.
French Economy Minister Christine Lagarde said today that computerized high-frequency trading (HFT) may need to be banned in some cases.
“My natural tendency would be at least to regulate, to oversee it very strictly, and after a cost-benefit analysis of these methods maybe to forbid it,” Lagarde told a French parliamentary commission on financial speculation.
“Or at least give market authorities the power to forbid it in circumstances that are considered exceptional,” she added.
Britain also signalled that tougher rules are needed, but indicated that regulations should be targeted. High-frequency trading accounts for about one-third of activity on the London Stock Exchange, Europe’s biggest equity market.
High-frequency trading is simply the evolution of trading to a much faster pace due to advances in technology, said Alexander Justham, director of markets at the U.K. Financial Services Authority.
“We are not here to turn the clock back,” he told a TradeTech 2010 markets industry conference in London.
“Computerized trading and methods such as algorithmic trading and HFT transact a huge number of trades in microseconds,” Justham observed. “If you drive so fast, the technology should be that you can brake as fast as well.”
Justham said HFT has narrowed bid/offer spreads but the jury is out on whether it has led to more efficient trading and whether it has created unfair advantages.
He also said there are key differences between North American and European markets, such as controls on who can trade and that availability of “circuit breakers” to slow sharp moves such as the shocking tumble on May 6 that briefly took the Dow Jones industrial average down by about 700 points.
“We are absolutely not complacent about the general risk of what all this means,” Justham said. “Has the playing field been tilted?”
In defence of high-frequency trading, industry officials noted that it takes place on regulated markets.
“The main issues are around credit derivatives and structured derivatives, all of which are happening in the dark,” said Kee-Meng Tan, managing director at Knight Capital, a trading services provider. “We're probably the most transparent part of the market.”
Jim Farachi, director at Getco, a player in high-frequency trading, said such firms “are market makers who utilize technology to provide liquidity to the market in a more efficient way than pit or phone trading.”
Britain's government announced earlier this week it was sponsoring a study into the impact of high-frequency trading on London as a financial centre over the coming decade.