1 November 2012
Dr Sylvain Friederich of the School of Economics, Finance and Management was one of the writers of the report published last week by the Government’s Chief Scientific Adviser Sir John Beddington and entitled "The Future of Computer Trading in Financial Markets – An International Perspective". (PDF, 3.4MB)
The report was the conclusion of a two-year research project examining the benefits and risks of computer-based trading, a controversial development that now represents the majority of quotes and trades in mature financial markets. The project was jointly sponsored by the Government Office for Science, HM Treasury and the Department of Business, Innovations and Skills, with the aim of informing policy-making at UK and EU levels.
The project was described by the New York Times (22nd October 2012) as “the most comprehensive effort to date to understand the computerized trading firms that have come to dominate the financial markets and generate anxiety among regulators and investors.” It brought together researchers from 20 countries to generate evidence on the links between computer-based trading and liquidity, volatility, the likelihood of market crashes and market manipulation.
The report finds evidence that computer-based, high-frequency traders were significant contributors to the liquidity and efficiency of today’s markets. It also warns that computer-based trading may lead to episodes of illiquidity and instability such as “Flash Crashes”. The report presents a cost and benefit analysis of each of the tools available to policy makers to curb high-frequency trading (HFT).
Dr Sylvain Friederich contributed several studies to the project. Three studies, written with Richard Payne of Cass Business School focus on the effect of high frequency trading on liquidity, on the likelihood of market abuse, and evaluating order-to-trade ratios as a policy tool. A fourth study (with Dr Mike Yearworth, of the University of Bristol’s System Centre) draws out a “systems map” of financial markets for policy makers to analyse interactions and feedback effects between players.
Note: some of the documents on this page are in PDF format. In order to view a PDF you will need Adobe Acrobat Reader
The report is the product of the most comprehensive effort to date to understand the computerized trading firms that have come to dominate the financial markets and generate anxiety among regulators and investors.