In a speech at the International Economic Association Sixteenth World Congress in Beijing, Andrew Haldane – Executive Director for Financial Stability and member of the interim Financial Policy Committee – outlines how dramatic shifts in the structure and speed of trading have increased abnormalities in the pricing of securities. This new topology of trading has potentially increased systemic risk. He then discusses several policy options to manage the impact of these developments on market dynamics.
The driving forces of change have been trading structure and trading speed. Changes in the structure of trading lay in two key regulatory changes: the 2005 Regulation NMS (National Market System) in the US and the European MiFID (Markets in Financial Instruments Directive) in 2004. These aimed to increase competition in, and attract new entrants to, the trading landscape. They effectively ended the central trading exchanges’ 300-year monopoly over trading activity, ushering in “…a diverse and distributed patchwork of exchanges and multilateral trading platforms…” with a diverse range of execution characteristics.
As regards speed, High Frequency Trading (HFT) has become a dominant force in a number of financial markets. This has partly been a response to exchange fragmentation. HFT has increased dramatically turnover in, and lowered dramatically the duration of, security holdings. New trade technologies have progressively raised the speed limit for trading. Today, this is measured in micro-seconds – millionths of a second. Tomorrow, it may be measured in nano-seconds – billionths of a second. There is effectively a ‘race to zero’ among trading technologists, as market advantage lies in being the fastest.
The effects of these developments on market dynamics are in some respects positive. Increased competition and HFT liquidity provision have lowered bid-ask spreads in markets, in some cases by an order of magnitude. But these effects are not entirely benign. There is evidence of increased volatility and correlation across markets since 2005. And fatter tails and greater persistence in prices than the efficient market hypothesis would imply. Moreover, these market abnormalities are occurring at ever-higher frequencies.
Andrew Haldane develops a framework to understand these effects. This uses a line of thinking owing to Benoît Mandelbrot, architect of fractal geometry. Mandelbrot posited that stock price changes are better understood when looked at in volume time rather than in clock time. As ever-larger volumes have been crammed into ever-smaller time parcels, the result may have been increasing abnormalities in prices when measured in clock time.
The cause of dislocations in price may be the disappearance of liquidity in situations of stress. Andrew Haldane argues that the advent of HFT and fragmentation may have made this more likely, with HFT firms more inclined to withdraw liquidity. Meanwhile, longer-term investors may be either unable or unwilling to fill the liquidity gap because HFT activity makes this unprofitable or risky. The result is a potential double liquidity void and a greater dislocation of prices at times of stress. Many of these features were evident during the so called “Flash Crash” of 6 May 2010 with HFT “…adding liquidity during a monsoon and absorbing it during a drought”.
Andrew Haldane states that the new topology of trading makes it more likely such price dislocations will be transmitted between cash and futures markets, between different exchanges and trading platforms and across stocks. In other words, high-frequency, localised price disturbances could be magnified across time, markets and assets – as Mandelbrot, too, would have predicted. The upshot, he argues, is a latter-day “tragedy of the commons”: the competitive race to zero risks amplifying pricing abnormalities in a way which benefits no-one.
The rapidly adapting topology of trading poses a challenging set of questions for policymakers. One task is to try to better understand, and potentially predict, systemic fault-lines in the trading infrastructure. New data will soon come on stream to better enable that risk-mapping. Many of the techniques for analysing those data already exist in other large-scale complex systems, such as weather and satellite systems.
A second task is to rethink the design of trading infrastructures. Regulators in the US and Europe are in the process of doing that. One proposal is to require a commitment by market-makers to provide liquidity, whatever the state of the market. The difficulty appears to be in specifying these commitments in a precise enough fashion to make them credible.
Circuit-breakers are a second potential solution. They already exist on US and European exchanges. By calling a halt to trading, circuit-breakers provide a means of establishing a level informational playing field for all traders. The changing landscape of trading, both in speed and structure, has strengthened the case for such circuit-breakers. To be effective, however, they need to span all trading exchanges and platforms, as has recently been done in the US.
A more ambitious proposal still would be to impose a speed limit on trades at all times – so-called minimum resting periods. This would forestall the race to zero. It would do so by raising bid-ask spreads on average. But it would also potentially make them less variable, especially in situations of stress, improving the resilience of liquidity. In other words, there is a potential trade-off between market efficiency and stability. Historically, the regulatory skew has perhaps been towards the former objective. The new topology of trading means it may be time for that to change. As Andrew Haldane concludes: “Grit in the wheels, like grit on the roads, could help forestall the next crash”.
Sunak to use budget to expand apprenticeships in England
LONDON (Reuters) – British finance minister Rishi Sunak will announce more funding for apprenticeships in England when he unveils his budget next week, the government said on Friday.
Employers taking part in the Apprenticeship Initiative Scheme will from April 1 receive 3,000 pounds ($4,179) for each apprentice hired, regardless of age – an increase on current grants of between 1,500 and 2,000 pounds depending on age.
The scheme will extended by six months until the end of September, the finance ministry said.
Sunak will also announce an extra 126 million pounds for traineeships for up to 43,000 placements.
Sunak’s March 3 budget will likely include a new round of spending to prop up the economy during what he hopes will be the last phase of lockdown, but he will also probably signal tax rises ahead to plug the huge hole in the public finances.
Sunak is also expected to announce a “flexi-job” apprenticeship scheme, whereby apprentices can join an agency and work for multiple employers in one sector, the finance ministry said.
“We know there’s more to do and it’s vital this continues throughout the next stage of our recovery, which is why I’m boosting support for these programmes, helping jobseekers and employers alike,” Sunak said in a statement.
(Reporting by Andy Bruce, editing by David Milliken)
UK seeks G7 consensus on digital competition after Facebook blackout
LONDON (Reuters) – Britain is seeking to build a consensus among G7 nations on how to stop large technology companies exploiting their dominance, warning that there can be no repeat of Facebook’s one-week media blackout in Australia.
Facebook’s row with the Australian government over payment for local news, although now resolved, has increased international focus on the power wielded by tech corporations.
“We will hold these companies to account and bridge the gap between what they say they do and what happens in practice,” Britain’s digital minister Oliver Dowden said on Friday.
“We will prevent these firms from exploiting their dominance to the detriment of people and the businesses that rely on them.”
Dowden said recent events had strengthened his view that digital markets did not currently function properly.
He spoke after a meeting with Facebook’s Vice-President for Global Affairs, Nick Clegg, a former British deputy prime minister.
“I put these concerns to Facebook and set out our interest in levelling the playing field to enable proper commercial relationships to be formed. We must avoid such nuclear options being taken again,” Dowden said in a statement.
Facebook said in a statement that the call had been constructive, and that it had already struck commercial deals with most major publishers in Britain.
“Nick strongly agreed with the Secretary of Stateâ€™s (Dowden’s) assertion that the governmentâ€™s general preference is for companies to enter freely into proper commercial relationships with each other,” a Facebook spokesman said.
Britain will host a meeting of G7 leaders in June.
It is seeking to build consensus there for coordinated action toward “promoting competitive, innovative digital markets while protecting the free speech and journalism that underpin our democracy and precious liberties,” Dowden said.
The G7 comprises the United States, Japan, Britain, Germany, France, Italy and Canada, but Australia has also been invited.
Britain is working on a new competition regime aimed at giving consumers more control over their data, and introducing legislation that could regulate social media platforms to prevent the spread of illegal or extremist content and bullying.
(Reporting by William James; Editing by Gareth Jones and John Stonestreet)
Britain to offer fast-track visas to bolster fintechs after Brexit
By Huw Jones
LONDON (Reuters) – Britain said on Friday it would offer a fast-track visa scheme for jobs at high-growth companies after a government-backed review warned that financial technology firms will struggle with Brexit and tougher competition for global talent.
Finance minister Rishi Sunak said that now Britain has left the European Union, it wants to make sure its immigration system helps businesses attract the best hires.
“This new fast-track scale-up stream will make it easier for fintech firms to recruit innovators and job creators, who will help them grow,” Sunak said in a statement.
Over 40% of fintech staff in Britain come from overseas, and the new visa scheme, open to migrants with job offers at high-growth firms that are scaling up, will start in March 2022.
Brexit cut fintechs’ access to the EU single market and made it far harder to employ staff from the bloc, leaving Britain less attractive for the industry.
The review published on Friday and headed by Ron Kalifa, former CEO of payments fintech Worldpay, set out a “strategy and delivery model” that also includes a new 1 billion pound ($1.39 billion) start-up fund.
“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.
Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.
The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance, all mean the sector’s future in Britain is not assured.
It also recommends more flexible listing rules for fintechs to catch up with New York.
“We recognise the need to make the UK attractive a more attractive location for IPOs,” said Britain’s financial services minister John Glen, adding that a separate review on listings rules would be published shortly.
“Those findings, along with Ron’s report today, should provide an excellent evidence base for further reform.”
Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.
“It’s a question of knowing who to call when there’s a problem,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.
A UK fintech wanting to serve EU clients would have to open a hub in the bloc, an expensive undertaking for a start-up.
“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” Swinburne said.
The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).
“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.
($1 = 0.7064 pounds)
(Reporting by Huw Jones; editing by Jane Merriman and John Stonestreet)
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