Bank of England’s Haldane Wants Speed Limits on High-Frequency Trading

As reported by Reuters, speed limits would cool the “arms race” of ultra-fast trading that has sparked price “abnormalities” and may destabilise markets, a top Bank of England official said on Friday.

Andrew Haldane, executive director for financial stability, said in a 25-page speech in Beijing that rapid growth in so-called high-frequency trading  (HFT) has come to dominate stock markets and is raising “contagion” concerns.

“It is not just talk. As recently as 2005, HFT accounted for less than a fifth of U.S. equity market turnover by volume. Today, it accounts for between two-thirds and three-quarters,” Haldane said.

HFT has helped to lower bid/ask spreads in markets but there is also evidence of increased volatility with abnormalities in prices occurring increasingly more often, Haldane said.

The United States looked at the role of ultra fast trading in last year’s “flash crash” which briefly sent Wall Street blue chips into a tailspin.

“The flash crash was a near miss. It taught us something important, if uncomfortable, about our state of knowledge of modern financial markets,” Haldane said.

The U.S. Securities and Exchange Commission is looking at how to rein in computerised trading that use algorithms to flood the market with orders in microseconds, often cancelling most of them.

Haldane flagged what he would like to see Europe do as well as traders push to pare down trading speeds even further.

“There is nothing normal about recent deviations in financial markets. The race to zero may have contributed to those abnormalities, adding liquidity during a monsoon and absorbing it during a drought,” Haldane said.

European Union regulators are due to include HFT curbs in a reform of the bloc’s trading rules this autumn, but will face some opposition as HFT has been a godsend to many exchanges, providing liquidity when volumes would otherwise be thin.

The London Stock Exchange launched a super fast trading service last month to court more HFT  business which already accounts for about half of its trading.

Haldane is a member of the BOE’s new Financial Policy Committee which will be driving Britain’s regulatory agenda, specifying what supervisors must do to nip risks in the bud.

He is also on a UK government sponsored panel that is looking at how HFT  could shape Britain’s financial centre.

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