BIS Report: The Future of Computer Trading in Financial Markets - An International Perspective
The development and application of new technology is arguably causing the most rapid changes in financial markets. High-Frequency Trading ("HFT") and algorithmic trading ("AT") have particularly attracted controversy relating to their possible benefits and risks. The International Foresight Project was commissioned to address two critical challenges: (i) how rapid technological developments, coupled with the ever-increasing complexity of financial trading and markets, affect HFT/AT on financial markets; and (ii) the lack of evidence and analysis to inform the development of new regulations (this is of particular concern because good regulation needs to be founded on good evidence and sound analysis).
The Foresight Final Project aims to determine how computer-based trading ("CBT") in financial markets across the world could evolve over the next ten years, identifying potential risks and opportunities that this could present. In addition, it aims to draw upon the available evidence to provide advice to policy makers, regulators and legislators on the options for addressing present and future risks while realizing potential benefits. While the effects CBT on financial markets have been the topic of controversy, analysis of available evidence shows that CBT has led to benefits to the operation of markets, notably relating to liquidity, transaction costs and the efficiency of market prices. The report suggests the following priorities for action: (i) limiting possible future market disturbances; (ii) making the surveillance of financial markets easier; and (iii) improving understanding of the effects of CBT in both the shorter and longer term. Over 150 leading academics from more than 20 countries have been involved in the work, which has been informed by over 50 commissioned papers subject to independent peer review.
Click here to view report (links externally to BIS website). Related news item: Story on O'Malia's recent HFT speech.