Bank of England Comes to Defense of ‘Flash Boys’

A study of the effects of high-frequency trading on U.K. stock prices claims to show that HFT firms make for a more efficient market.
Matthew HellerFebruary 24, 2015
Bank of England Comes to Defense of ‘Flash Boys’

The Bank of England has come to the defense of high-frequency trading, finding that it actually makes a positive contribution to stock price efficiency.

In a new working paper, the BOE, also known as the “Old Lady of Threadneedle Street,” concluded that HFT has a positive effect on markets, at least in terms of determining stock prices.

HFT firms appear to be reacting simultaneously and quickly to new information as it arrives at the marketplace, which makes prices more efficient,” the report says. “This suggests that correlated trading by HFT firms does not appear to contribute to undue price pressure and price dislocations on a systematic basis in the U.K. equity market.”

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The bank’s researchers analyzed how the FTSE 100 Index’s 20 largest stocks traded on the London Stock Exchange in the four months through the end of 2012, comparing the trades of 10 HFT firms with the orders placed by 10 investment banks.

HFT firms more than investment banks tend “to buy or sell aggressively the same stock at the same time,” the bank noted, and also tend to “simultaneously aggressively buy and sell multiple stocks at the same time to a larger extent than a typical investment bank.”

The BOE found that instances of simultaneous trading by HFT firms are associated with a permanent price impact whereas correlated trading by investment banks is associated with only a temporary price impact. That suggests that the computerized firms based their transactions on information about companies, enhancing pricing efficiency.

“Overall, I think it’s a good thing for the market,” Michael Horan, the head of trading at Pershing, told Bloomberg. “Spreads have tightened and there’s empirical evidence to support that.”

Concerns about high-frequency trading have been fueled by such incidents as the May 6, 2010, “Flash Crash’ in the United States. Critics of the practice include Warren Buffett and Michael Lewis, who, in his book “Flash Boys,” warned that high-frequency traders could use more powerful computers and faster networks to obtain an unfair advantage.

The Bank of England cautioned that additional research is needed to assess whether HFT activity may cause or exacerbate price dislocations in the equity or other financial markets.