Algorithmic Trading

Lord Bridges of Headley Excerpts

Monday 6th July 2015 Lords Chamber

[Baroness Wheatcroft]

To ask Her Majesty’s Government whether the effects of algorithmic trading are being monitored and sufficiently regulated.

[The Parliamentary Secretary, Cabinet Office (Lord Bridges of Headley)]

My Lords, regulators continue to watch carefully and act when required in this fast-growing area of activity in financial markets. Investment firms and trading venues using algorithmic trading in the UK are already regulated and supervised by the Financial Conduct Authority and the Prudential Regulation Authority. From 2017 they will need to abide by the rules on algorithmic trading in the EU Markets in Financial Instruments Directive II.

[Baroness Wheatcroft (Con)]

My Lords, I thank my noble friend for his reply and declare my interests as listed in the register. MiFID II will undoubtedly improve regulation, although I welcome my noble friend’s assurance that the regulators will have the resources to implement those rules. However, does he share my wider concern about algorithmic trading—that it operates to the detriment of ordinary investors and is the antithesis of the long-term investment we should be encouraging? What can he do to address this?

[Lord Bridges of Headley]

My noble friend speaks with a lot of experience on these matters. I would point her to the very interesting Foresight research carried out by the Government, which looked into this. As a result of that, we do not think that the long-term investment decision-making by companies is undermined by high-frequency traders, which should be differentiated from algorithmic trading in the round. That said, during the last Parliament, in response to the Kay review, the Government initiated a broad review of reforms to address long-standing concerns that short-termism on the part of investors has impeded the creation of sustainable value by British companies. The Government are considering what steps are appropriate to make further progress in shifting the culture of equity markets towards long-termism.

[Lord Campbell-Savours (Lab)]

My Lords, is it not true that many of those who ended up making a small fortune through algorithmic trading started off with a large one?

[Lord Bridges of Headley]

As so often, the noble Lord speaks with a great amount of insight and experience, I am sure, on this matter.

[Baroness Kramer (LD)]

I wonder if the Minister could answer the question from the noble Baroness, Lady Wheatcroft, on the impact on small investors. Would he not agree that ever higher speed high-frequency trading, together with dark pools, has in effect rigged the trade in financial instruments against small investors?

[Lord Bridges of Headley]

I reiterate that the PRA, and Andrew Bailey in a speech last month, drew attention to a lot of these issues. I hope the noble Baroness takes some consolation from that and from what I said about the FCA. On smaller investors, as I said, the Government are looking at this issue. I draw attention to the Foresight report which said,

“transaction costs have fallen for both retail and institutional traders”.

We therefore need to look at this in a balanced and proportionate way.

[Lord McFall of Alcluith (Lab)]

My Lords, this House received compelling evidence from the Economic Affairs Committee that through HFT, billions of pounds of shares were being traded every day with little or no public exposure. Technology is being used not to ensure that we introduce fairness and neutrality into the market, but to receive information ahead of the rest of the market. This was described as the battle of microseconds, whereby ordinary investors and others are screwed because they do not understand the concept. The Government and the regulators are on the outside looking in; full transparency of the market is essential. Government have a public duty, and there has been laxity so far; they really should put their skates on. Then, the next time there is a “flash crash” or a liquidity value, they cannot put their hands up and say that it is nothing to do with them. Full transparency and disclosure are essential and it is time that the Government acted.

[Lord Bridges of Headley]

My Lords, that was a high-frequency question as far as I can see. The noble Lord raised a number of points. Investment firms that operate what are often termed dark pools are subject to code of business rules that require them to treat their customers fairly. As I mentioned in my opening answer, MiFID II will further introduce strict volume caps on the amount of equities trading that can take place under waivers from transparency. That will significantly reduce such dark trading.

[Lord Reid of Cardowan (Lab)]

Given the centrality of the City of London to the British economy and the intention expressed more than a decade ago by some of those associated with Islamist jihadism to “bleed Britain to bankruptcy”, can the Minister tell us what measures have been taken to protect the City of London from hacking, particularly given that a vast number of essential economic investments are now being transacted in nanoseconds?

[Lord Bridges of Headley]

The noble Lord speaks with a lot of experience on these matters, which are worthy of consideration. If he will forgive me, I would like to write to him on that point as it requires a detailed answer.

[Lord Davies of Oldham (Lab)]

My Lords, I hope that the Minister is not indulging in that degree of complacency—saying, “It’s all under control”—which the senior management of significant banks indulged in, and then found themselves taken to the cleaners by the operations of relatively lowly placed staff. One thinks particularly of UBS losing £1.7 billion from someone trading in this manner. The noble Lord must know that the technology of increased speed is widening the spread between buying and selling, and therefore gives an incentive to people operating at that level to take advantage.

[Lord Bridges of Headley]

My Lords, I am certainly not complacent. The noble Lord raises a good point, and I reiterate that the Government take the matter of regulating financial markets in their entirety very seriously and closely follow developments in these markets. As I said, investment firms and trading venues should ensure that robust measures are in place to prevent automated trading creating a disorderly market and being used for abusive purposes. The new rules under MiFID II will ensure that such measures are in place.

[The Lord Bishop of Chester]

My Lords, I am a bear of little brain in relation to algo-whatever-it-is trading, and I speak as a fool. However, would this not all be solved if there was a rule that if you bought shares, you had to keep them for more than a few nanoseconds—maybe a few minutes?

[Lord Bridges of Headley]

The right reverend Prelate makes an interesting point. I refer him to the excellent Foresight report, which says that,

“liquidity, as measured by bid-ask spreads”—

I will test him on that later—

“and other metrics, has improved”.