Securities body IOSCO calls for limits on algo trading

An international body that is tasked with helping control securities markets has called for tighter limitations on high-speed trading systems.

In a report, the International Organisation of Securities Commissions (IOSCO) is calling for greater controls of high-speed trading systems to "mitigate risks", at a time when automatic algorithmic trading activity is increasing.

IOSCO is made up of securities markets trading watchdogs around the world and its report was in response to a call from G20 leaders amidst the continuing global financial crisis and fragile trading markets.

The report, "Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency", contains recommendations for controlling threats posed by high frequency and algorithmic trading.

Masamichi Kono, chairman of IOSCO’s technical committee, said: “Markets are evolving rapidly and it is important for regulators not only to monitor developments in technology and market structure, but also to continue to assess the impact of these changes on market integrity and efficiency and to address any risks identified."

G20 finance ministers have already backed the recommendations made in the report. Kono said their implementation would "assist regulators in identifying what impact developments such as high frequency and algorithmic trading have on the markets they oversee".

He said the recommendations would "promote a globally consistent approach by regulators in addressing these issues and contribute to regulators' ability to mitigate the risks that these activities may pose to the integrity and efficiency of global capital markets."

IOSCO said it will provide additional guidance on market surveillance in 2012.

IOSCO recommendations on market integrity and efficiency include:

- Regulators should require that trading venue operators provide fair, transparent and non-descriminatory access to their markets

- Regulators should ensure that trading venues have in place suitable trading control mechanisms to deal with volatile market conditions, and that trading systems and algorithms are robust and flexible enough to deal with sudden market changes.

- And regulators should continue to assess the impact on market integrity and efficiency of technological developments and market structure changes, including algorithmic and high frequency trading. Risks to price formation and market resilience are areas to be considered.

Last month the US Securities and Exchange Commission, drawing on lessons from last year's Flash Crash, said it was seeking to overhaul rules that are currently designed to shut down the stock market during periods of volatility.

The proposed curbs would be triggered when the Standard & Poor's 500 Index fell 7 percent.

Copyright © 2011 IDG Communications, Inc.

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