A M16 assault rifle can fire a bullet 100m in just over a 10th of a second. In the same amount of time, the London Stock Exchange can now execute 800 trades. Armed with the world’s fastest trading system, the LSE hopes that – at least for now – it has the upper hand in the battle to attract high-frequency traders. This competition is intense and fuelled by lawmakers who have created the cut-throat environment in which exchanges operate and strive to be bigger and faster than their rivals. Sound familiar? Many unemployed bankers think so.
HFT may account for half of all equity trading (and much the same proportion of revenues) in New York and a quarter in London. And there is probably more in the gigantic “dark pools” of off-exchange trading inaccessible to retail investors.
Given this size, regulators’ lack of understanding is alarming. Even Xavier Rolet, LSE chief executive, admits unintended consequences have arisen from the exchanges’ competition to snag transactions. The world received a glimpse of the possibilities in May, when just one computer system at one non-HFT company caused the “flash crash”. It took just five minutes for the Dow to lose 600 points but five months for the US authorities to come up with a reasonable explanation.