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The Foresight report also says regulatory constraints around high-speed trading should be coordinated across markets that are strongly linked, and urges authorities to look at the establishment of a US-style financial data centre in Europe to collect, standardise and analyse trades. Many electronic market-makers have complained that government policy is based on emotive and anecdotal evidence and populist rhetoric.
The Foresight report was set up to examine, with academic and peer-reviewed evidence, the long and short-term effects of computerised trading and high-frequency trading. Headed by Professor Sir John Beddington, it has the input of several hundred academics and market participants. It does not represent the position of any government. It found that high-frequency trading had cut transaction costs and improved market liquidity, as measured by bid-ask spreads. “While overall liquidity has improved, there appears to be a greater potential for periodic illiquidity”, it cautioned. The issue of tick sizes has also been sensitive as reductions have been used as a way to attract “high-frequency” traders and other statistical arbitrage players involved in high-speed trading.
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Full report, 'The Future of Computer Trading in Financial Markets' © Crown copyright