Foresight Working Paper - Regulation of Algo Trading

The UK government commissioned a survey (linked below, though I had some trouble opening the link without help from my help desk) to consider the benefits of various types of regulation of computerized algorithmic trading. Among the regulatory requirements considered in the study were (i) order to execution ratios, (ii) minimum resting times for orders, (iii) changes to tick size, (iv) circuit breakers, (v) requiring algo traders to act as market makers (providing continuous bid offers) and (vi) requiring traders to provide their algos to the regulators. The linked working paper presents interim findings of the project, including the costs, risks and benefits of various regulatory measures, which are currently being considered within the European Union's Markets in Financial Instruments Directive 2 (MiFID II). The working paper also draws on the work and advice of a large number of academics. Generally speaking, the conclusions of the study (at page 28) are fairly skeptical of the benefits of most of the regulatory proposal and some of the proposals (including those that may be considered in the United States, such as requiring disclosure of algos, are essentially described as being both prohibitively expensive and ultimately futile).

Lofchie Comment: As noted, many of the proposals being considered in the study are also being considered for implentation in the United States. Accordingly, anyone with an interest in algo trading, whether for or against, would be advised to review the study carefully. (Whenever I see a study produced at the direction of the UK regulators, I am left with the impression that the curiosity of the regulators there is far less subordinate to political pressures than is the case here; it must be that the UK regulatory system provides some procedures that we would benefit from stealing.)

View paper in full here (links externally to Commodities-Now website). Additional materials: FIA EPTA's Position Paper