Top Bank official calls for speed limits on high frequency trading

Top Bank official calls for speed limits on high frequency trading

Securities markets should consider the introduction of speed limits on high frequency trading to prevent the risk of market abnormalities disrupting prices, a top Bank of England official says.

In a speech in Beijing, Andrew Haldane, the Bank of England's cerebral executive director for financial stability, talks of a 'race to zero' among trading technologists, as dealers look to steal an advantage on rivals by being the fastest to market.

While HFT liquidity provision may have lowered bid-ask spreads in markets, he says, there is also evidence of increased volatility through fatter tails and greater persistence in prices, with the risks to global financial stability heightened by interconnected markets.

With HFT firms more inclined to withdraw liquidity during times of extreme volatility and longer-term investors either unable or unwilling to fill the liquidity gap, the result is a potential "double liquidity void" and a greater dislocation of prices. Many of these features were evident during the last years' flash crash, says Haldane with HFT "…adding liquidity during a monsoon and absorbing it during a drought".

He says that regulators may need to adopt techniques that already exist in other large-scale complex systems, such as weather and satellite systems to better understand, and potentially predict, systemic fault-lines in the trading infrastructure.

Regulators may also need to look beyond crude circuit breakers, he suggests, by imposing a speed limit on trades at all times - so-called minimum resting periods. Such a measure would raise bid-ask spreads on average, but it would also potentially make them less variable, especially in situations of stress, improving the resilience of liquidity.

As Haldane concludes: "Grit in the wheels, like grit on the roads, could help forestall the next crash."

Read the full speech:» Download the document now 386.9 kb (PDF File)

Comments: (1)

A Finextra member
A Finextra member 11 July, 2011, 08:25Be the first to give this comment the thumbs up 0 likes

A good speech at the right time, if not a bit late ...

Many firms have invested in high frequency trading (HFT) and derive nice profits thereof. However, the overall benefit of HFT to the economy is not very clear, whereas the risks (which are also not quite clear) are certainly significant.

Introducing a speed limit can help to reduce those risk, and can give a chance to those unlucky human traders who made a "fat finger" mistake. Exhanges are about making investments, there is a lot of money at stake - and introducing a short "think time" will not hurt the economy.  

Further developing electronic exchange technology is great, but it seems adviseable to focus more on reliability and security than on speed.

 

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