European Union plans to clamp down on trading shares faster than the blink of an eye could damage market efficiency and reduce liquidity, a UK government-sponsored paper said, rejecting a key Brussels proposal to force traders to hold shares for longer.
HFT systems, which account for about 30% of equity trading in the UK and over 60% in the United States, have been criticised by regulators in recent years for increasing market volatility and driving up food prices.
European Union lawmakers last month called for high-frequency trading (HFT) systems to post share orders for at least half a second, far longer than currently. The proposal came as part of a review of the Markets in Financial Instruments Directive (MiFID), tabled by the European Commission a year ago.
But the proposal is meeting with resistance from key players in Europe's London-based financial sector, who claim that curbs on high-frequency trading will hurt investors.
A report by the Foresight Project, which was sponsored by the British government and gathered evidence from 150 academics and experts from 20 countries, said plans to force minimum resting times on orders could reduce liquidity.
"The Project has found that some of the commonly held negative perceptions surrounding HFT are not supported by the available evidence and, indeed, that HFT may have modestly improved the functioning of markets in some respects," said John Beddington, the UK's chief scientific advisor and lead author of the report.
"However it is believed that policymakers are justified in being concerned about the possible effects of HFT," he added.
Out of nine EU policy proposals examined, the Foresight paper found two were effective while seven were "problematic", including a plan to force HFT to post prices to buy and sell at all times, a measure designed to stop them from pulling out when markets get choppy.
The report found no direct evidence that HFT increased volatility, nor evidence to suggest it has led to an increase in market abuse.
It said that computer-based trading could have adverse side effects in some circumstances and that these risks should be addressed.
The report called for regulatory action to identify the problems and create incentives to prevent accidents.
The Bureau of Investigative Journalism has criticised the make-up of the Foresight Project, saying the majority of the financial services members on one of its two advisory panels was linked to the HFT industry.
The UK government welcomed the report as "an important contribution to the regulatory debate on the use of computer trading both in the UK and internationally."