Foresight Project Pronounces HFTs Mostly A O.K.

High-frequency trading gets a clean, but qualified, bill of health from a just released study sponsored by the British government.

The International Foresight Project, a two-year investigation of electronic trading and markets, underwritten by the U.K. Government Office for Science, found no evidence that high-frequency trading has increased volatility or market abuse in the world’s financial markets.

“Some of the commonly held negative perceptions surrounding HFT are not supported by the available evidence,” John Beddington, the chief scientific adviser to the British government, wrote in the report. “Indeed, HFT may have modestly improved the functioning of markets in some respects.”

Still, Beddington cautions that policy makers are justified in their concerns about “the possible effects of HFT on instability in financial markets.”

The study, released Tuesday, is the largest of its kind ever, involving the work of 150 academics from more than 20 countries. Done independently, the study does not reflect the views of the U.K. government, the authors state.

While the authors wrote that there is no evidence that high-frequency trading is manipulative, they note there is insufficient data to prove this point. The Project reviewed “qualitative evidence on perceived levels of manipulation” obtained in interviews with traders, investors, journalists, regulators and others. These interviews revealed “high levels of concern” that need to be taken seriously by policy makers, the report said.

And while the authors state there is no evidence that high-frequency trading leads to volatility, they note that computer-based trading-not high-frequency trading, per se-can lead to significant instability in “specific circumstances.” The report recommends that policy makers consider the use of circuit breakers to reduce volatility.

The report cautions against imposing such rules on market participants as minimum quote lives; order-to-execution ratios; a wholesale revamp of maker-taker pricing; market maker obligations; and registration of algorithms.