Computer based trading has transformed how our financial markets operate. The volume of financial products traded through computer automated trading taking place at high speed and with little human involvement has increased dramatically in the past few years. For example, today, over one third of United Kingdom equity trading volume is generated through high frequency automated computer trading while in the US this figure is closer to three-quarters.
Whilst the prevalence of computer based trading is not disputed, there are diverse views on the risks and benefits which it brings today, and how these could develop in the future. Gaining a better understanding of these issues is critical as they affect the health of the financial services sector and the wider economies this serves. The increasingly rapid changes in financial markets mean that foresight is vital if a resilient regulatory framework is to be put in place. A key aim of this Foresight project, which has been overseen by a group of leading experts, has therefore been to draw upon the very best science and evidence from across the world to take an independent look at these issues.
The three papers presented here review evidence directly commissioned by the project as well as the wider evidence base. Leading experts from over 20 countries have been involved in writing and peer reviewing this material. The first paper considers the effect of computer trading on financial stability. It reviews the evidence of its past effect, and considers possible future risks. In contrast, the second paper considers the benefits that computer trading has had on liquidity, price efficiency and transaction costs. Together these two papers paint a picture of both risks and benefits, and for this reason neither paper should be read in isolation. The third paper focuses on technology. Importantly, the results documented here represent the independent views of academics.