A former financial services minister has called for an enquiry into the impact of high frequency algorithmic trading on financial markets.
Lord Myner, who was City minister at the UK treasury while Gordon Brown was prime minister, told the Sunday Telegraph this weekend that so-called black box trading "appears so detached from the true function of capital markets, but is potentially fraught with hazard."
"It definitely deserves more attention than either the FSA or the Treasury has given it," he said.
Myner’s remarks follow a disastrous few weeks on the financial markets, in which $4 trillion has been wiped off the value of the world’s stocks.
Critics argue that algorithmic trading, in which trades are triggered automatically based on patterns in share prices, makes financial markets more susceptible to severe swings and mass sell-offs.
Algorithmic trading has been blamed for the flash crash of May 2010, in which shares lost $1 trillion of value in a single day.
An investigation by the US’ Securities Exchange Commission found the cause to have been a algorithmic trading system operated by US investment firm Waddell & Reed, which had sold $4.1 billion of stock index futures in 20 minutes. This set off a chain reaction of other trading systems that had been programmed to sell those stock index futures if the price fell below a certain threshold.
A government probe into algorithmic trading, entitled the ‘Future of Computer Trading in Financial Markets’, is already underway, and will report its findings next year.
