LONDON, July 8 (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 cash 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.
ARMS RACE
Ultra fast trading has moved beyond stocks and into commodities and foreign exchange, raising concerns about what Haldane described as a potential "contagion" effect across time, markets and assets.
"The micro would transmute to the macro," Haldane said.
The way trading platforms are designed must be rethought and one solution is to force market-makers to provide liquidity in good times as well as bad, as U.S. and EU regulators are looking at, thought this won't be easy to define, Haldane said.
So-called circuit breakers or trading suspensions already exist but they need to span all trading venues to be effective in regions like Europe where there are many competing platforms that trade the same stocks, Haldane said.
He lent support to requiring orders to be placed on a platform for minimum periods of time -- making it more likely they will find a buyer and discourage the practice of ultra-fast traders of darting in and out of markets in microseconds but without actually completing an order.
"They tackle the arms race at source by imposing a speed limit on trading," Haldane said.
Such "minimum resting periods" are being mulled in the EU and United States but are facing fierce opposition from dealers who argue this would make markets less liquid and efficient.
Haldane dismissed this argument, saying it would improve resilience in liquidity during times of stress.
"At times, the efficiency of financial markets and their systemic resilience need to be traded off. This may be one such moment," Haldane said.
"Historically, the regulatory skew has been heavily towards the efficiency objective. Given today's trading topology, it may be time for that to change."
The International Organisation of Securities Commissions (IOSCO) published a consultation paper on Tuesday looking at how to mitigate risks from HFT and other trading technologies.
By Huw Jones
Source: www.reuters.com
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