With the publication of the recent Bank of England report demonstrating that high frequency trading makes pricing more accurate in the markets it seems a good time to consider not only why this is good for the markets, but why, in fact, it benefits the economy as a whole. The markets have an enormous impact on the smooth-running of the economy in modern capitalist democracies, as we’ve all witnessed in recent years. The markets power our economies through the transfer of capital (i.e. moving money around): just like the engine in a car. If you follow this analogy through, you can begin to understand how some of the key components of the markets fit together, with capital as petrol, and market makers providing the essential (but rarely seen) oil.
Technological change is reshaping our lives at a remarkable rate: few people in the 80s could ever have anticipated just how quickly the ZX81s and BBC Micros would transform into each of us carrying a smart phone, which processes more than 100,000 times faster than a ZX81.
Every industry has used technology to make their work faster, more efficient, and safer. Take the Ford Escort (a very popular car in the 80s): it didn’t have ABS, or an airbag; it did about 15 miles to the gallon and if you rode in one now you’d be terrified because the chassis would seem paper-thin. Today we have hybrids as well as far more efficient engines, hugely advanced safety systems as well as options for smart technology such as parking sensors or even self-parking options, GPS and steering wheels which vibrate when you’re not in the middle of the lane. I’d never have imagined back then that one day my car would be telling me to correct my steering.
So we’re very proud to say that technology has done the same in the markets: made them more efficient, safer and better value for customers. The increase in pension value due to high speed technology is 30% - a total value increase equivalent to the GDP of France. One of the most important changes in the exchange-traded markets is that they are now more transparent. When we all stood around shouting in pits we’d be waiting 20 minutes for a trade confirmation and data was far less available, and therefore far less reliable. Now, with every electronic transaction logged, it is possible for regulators to scrutinise behaviour more easily, as well as for everyone involved to get accurate, up to the minute (or rather micro-second) prices.
Like cars, and all other technology, these positive trends are set to continue, to benefit everyone in our society with safer markets.
The views expressed in this blog post are the personal opinions of the author and do not necessarily reflect the official policies or positions of the FIA European Principal Traders Association or the Futures Industry Association.
First published by Automated Trader on 16th March.