LONDON, July 7 (Reuters)- Rule changes are needed to contain risks from the rapid spread of ultra fast share trading that contributed to Wall Street's "flash crash," global regulators said on Thursday.
Leaders of the world's top 20 economies (G20) asked the International Organisation of Securities Commissions (IOSCO) to study how high frequency trading (HFT) and other computer assisted trading developments posed risks to the broader financial system.
"Whilst developments may have helped foster innovation and choice or improve market efficiency and liquidity, these same developments may also have had negative effects," IOSCO said in its report released on Thursday.
"For instance, whilst algorithms and HFT technology have been used by market participants to manage their trading and risk, their usage was also clearly a contributing factor in the flash crash event of May 6, 2010," the report added.
The flash crash briefly sent U.S. blue chips into freefall, triggering a regulatory review and sending shivers down the spines of regulators and investors across the world.
HFT-derived volumes now account for half or more of trading on exchanges such as the London Stock Exchange (LSE.L) and U.S. trading platforms, providing liquidity that would otherwise be much thinner.
HFT firms are accused of flooding markets with orders that are cancelled in microseconds, leading to volatility.
IOSCO includes regulators such as the U.S. Securities and Exchange Commission, which is now mulling new rules to avert another flash crash. The public consultation by IOSCO ends in August.
IOSCO will then prepare a further report for G20 finance ministers meeting in October. Many of the suggestions in the report are already being introduced or considered in the United States and the European Union.
IOSCO said technological advances have helped to bring globally competitive markets, cut transaction times and generate audit trails to improve market transparency.
"The various benefits arising from technological advances should not, however, overshadow the risks that these innovations pose to the efficiency and integrity of markets," the report said.
Some market participants say HFT discourages them from trading as they feel "at an inherent disadvantage to these traders' superior technology," the report said.
"Another concern is that the growing involvement of automated quantitative trading strategies may also contribute to the transmission of shocks across trading venues trading the same product or across markets trading different assets or asset classes."
But the report also hinted at differences among regulators over what to do and how radical any measures should be.
"What is less clear is the extent of these risks in practice and what regulatory action should be prioritised," IOSCO said.
"IOSCO considers that the broad issues of market structure and market surveillance capacity, including the costs of the additional surveillance capacity needed to adequately deal with these changes, require particular consideration," the Madrid-based watchdog added.
The report includes several suggestions for action:
-- Supervisors should consider rules specifically for HFT, such as stress testing of algorithms, internal signing off on new algorithms to specific charges or a tax on high order entry or cancellation rates.
-- Consider whether firms that are not direct members of an exchange should undergo authorisation by regulators if this is not already the case.
-- Consider minimum order size and minimum order book resting time.