September 30, 2010 / 8:33 AM / 9 years ago

UPDATE 2-UK to probe high-frequency trading

* Probe to look at possible failures of ultra-fast trading

* U.S. regulators finalize “flash crash” report

* FSA has said no plans to regulate technology

(Recasts with confirmation, adds detail)

By Laurence Fletcher

LONDON, Sept 30 (Reuters) - Britain has commissioned a probe into the controversial practice of high-frequency trading amid concerns that a computer-generated error could affect the economy.

The UK Treasury study, one of a number of probes into the secretive sector, comes as U.S. regulators finalise their report into May’s market “flash crash”, which some commentators have said was exacerbated by ultra-fast computer-driven trading systems. [ID:nN29138901]

Britain’s Financial Services Authority has already looked into some of the potential impacts of such trading on markets and the Committee of European Securities Regulators has said trading systems need to “keep pace” with high-frequency traders and additional surveillance of these firms is required.

“HM Treasury is working with the Government Office for Science to look into the application of scientific advances in financial markets,” a spokesman said.

The Financial Times, quoting an email from an official in the Treasury, said the study will “explore how computer-generated trading and failures might evolve in the future and impact” on financial stability.

“The possibility remains of a computer-generated trading failure occurring in the UK and having a significant economic impact,” the email said.

High-frequency trading firms, which can include hedge funds and proprietary trading firms, can make tens of thousands of lightning-fast trades a day, often aiming to beat other investors by moving their computers physically next to an exchange to gain an extra advantage.

Strategies include very quickly detecting a would-be buyer or seller in a stock and then trading on it, or making markets in a stock on a wide spread — a practice high-frequency trading firms say has narrowed spreads and given other investors better prices.

Critics say programmes that work without human intervention can get caught in a vicious cycle of selling during a market fall.

Ultra-fast trading accounts for 30-50 percent of equity market volumes, Britain’s Financial Services Authority has said, compared with 60-70 percent in the United States.

The FSA said earlier this year its role was not to regulate technology, although it did say that trading and clearing systems must be robust enough to deal with high-frequency trading and risk controls should be in place to stop so-called ‘fat finger’ errors damaging the market.

The Treasury will sponsor the study led by Lucas Pedace, in the Government Office for Science, part of the Department for Business, Innovation and Skills, the FT said. (To read the Reuters Funds Blog click on blogs.reuters.com/fundshub; for the Global Investing Blog click here) (Additional reporting by Sumeet Desai, Luke Jeffs and Karolina Tagaris; Editing by David Cowell)

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