Cautious BoE in no rush to restrict algorithmic trading

LONDON (Reuters) - The spread of ultra-fast trading in stock, bond and currency markets and accompanying “flash crashes” do not call for immediate action from regulators, a senior Bank of England official said on Friday.

A man talks on a mobile phone as people walk past the Bank of England, in London, Britain September 21, 2017. REUTERS/Mary Turner

But there was a risk that similar disruptive episodes in the future could cause longer-lasting damage to the financial system, its executive director for markets Chris Salmon said.

Wild share price fluctuations linked to algorithmic trades during a single U.S. session in 2010 triggered alarm among regulators, as did a similar episode in the U.S. bond market four years later.

Salmon said there was much evidence that ultra high-speed automated trading by computer algorithms had made markets more efficient, despite the phenomenon of flash crashes it had given rise to.

Algorithmic traders, who other parts of the market accuse of having a destabilizing impact on price movements, account for increasing proportions of volumes on exchanges as banks have pulled back from markets.

Regulators have already taken some action to rein traders who dart in and out of markets at fast speeds, such as by allowing “speed bumps” and banning some trading practices.

But Salmon said the BoE’s “headline conclusion” that no further action was required now should be tempered as future “flash episodes” could ripple further.

“Specifically, in my view, we are not yet in a position to rule out that future flash episodes might interact with aspects of financial market infrastructure in a way that gives rise to longer-lasting disruption,” he told a conference.

A future flash episode could coincide with benchmark fixings in foreign exchange markets, or a margin call related to equity or derivative markets.

“The resulting impact on the recorded values of a range of assets might risk mechanically prompting further sales and price falls.”

However, no risk is “flashing red that requires an immediate response”, he said.

Reporting by Huw Jones; editing by John Stonestreet