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The Trading Mesh

The Future of Computer Trading in Financial Markets Working Paper

Thu, 08 Sep 2011 07:58:00 GMT           

In November last year, the UK Government’s Department of Business, Innovation & Skills put together a Foresight Project to look into the future of computer trading in Financial Markets, led by the Government’s Chief Scientific Adviser, Professor Sir John Beddington.

The group has just released its initial Working Paper, which you can download here:

Foresight project Working Paper Sep 2011

In the coming weeks, we’ll be providing some detailed analysis of these initial findings, and speaking to various industry experts to get their view on the Working Paper.

In the meantime, here’s a quick overview of the key findings.

  • There is no direct evidence that high frequency trading increases market volatility.
  • In specific circumstances however, self-reinforcing feedback loops can amplify risks and lead to undesired outcomes. These feedback loops can be driven by a range of factors, including market volume/volatility changes, market news and delays in data distribution.
  • Mention is also made of a phenomenon known as normalisation of deviance, whereby unusual events can be seen as increasingly normal until a disaster occurs.
  • One of the report’s conclusions is that human traders will simply no longer be required in some market roles.
  • The pace of technological innovation in the financial markets is set to continue or even increase.
  • Emerging economies (Brazil, Russia, India, China) are likely to capitalise on the opportunities these new technologies present.

The report makes for very interesting reading.

If you want to find out more about the Foresight Project and look at all the supporting evidence (which is very well-documented), their website is at:

http://www.bis.gov.uk/foresight/our-work/projects/current-projects/computer-trading

Just as a side note, you can find interviews with Lead Expert Group member Kevin Houstoun and High Level Stakeholder Dr Kay Swinburne on this site here:

Kevin Houstoun - How FIX Protocol Limited is Evolving with the Growth of Computerized Trading

Dr Kay Swinburne - European Regulation, High Frequency Trading and the Draft MiFID Review

Watch this space!

 

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