| LONDON, July 7
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
"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
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
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
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 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
For full report click here
(Reporting by Huw Jones; Editing by Gary Hill)