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Trichet, Turner Question Real Value of Bigger, Faster Trading

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Jean Claude-Trichet
Jean Claude-Trichet, former president of the European Central Bank, in Davos on Jan. 27. Photographer: Chris Ratcliffe/Bloomberg

Jan. 27 (Bloomberg) -- The technology-driven jump in trading volume has been of little discernible benefit to the real economy and must be more closely watched by regulators, policy makers said at a debate at the World Economic Forum.

Jean-Claude Trichet, former president of the European Central Bank, Adair Turner, chairman of the U.K.’s Financial Services Authority, and Guillermo Ortiz, ex-governor of Mexico’s central bank, told the debate today hosted by Bloomberg Television in Davos, Switzerland that high-frequency trading should be scrutinized as a source of systemic risk.

The three attendees of this week’s WEF in the mountain resort were debating regulators’ progress in taming risk in the financial system after years of crises. High-frequency trading, where firms use computer-driven algorithms to place hundreds of trades a second, now accounts for more than half of U.S. stock trading volume, according to data compiled by Bloomberg.

“Before the crisis, there was a very strong belief within the economic profession that this was good,” Turner said of higher trading. “We know from the efficient-market hypothesis that the more markets you have, the more allocative efficiency there will be, the more risk will be shared, the better price discovery we will have. But once you’ve got a reasonably active, liquid market, is there any real value? I think it’s quite reasonable of us to ask searching questions in a way we didn’t before the crisis on whether this is limitlessly good.”

The European Union announced in October a plan to curb high-frequency trading following the so-called flash crash last May, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

‘Incredible Intellectual Exercise’

“It is an incredible intellectual exercise to try to catch up with these new tools that are permanently putting into question the wisdom of our own regulation,” Trichet said. “We have to be prepared for even more dramatic changes in the functioning of IT and therefore the functioning of markets.”

Trading volumes in foreign exchange and credit have exploded in recent years as improvements in technology enabled companies to place more trades more quickly in more asset classes, Turner said.

“The acid test here is to ask yourself whether new products and innovation is something that benefits directly or indirectly the real sector of the economy, the households,” said Ortiz. “Does it help to better allocate resources, does it help distribute risk better, or are we just talking about bets that are being taken in the financial sector and have nothing to do with the real economy?”

The debate participants, who also included Standard Chartered Plc Chief Executive Officer Peter Sands and Luxembourg Finance Minister Luc Frieden, disagreed over whether bank size makes a difference to their riskiness to the financial system. Sands said U.K. proposals risk splitting banks into entities similar in size to most that have failed over time.

“I’m comfortable if a hedge fund takes risk on behalf of his own investors and if they do well they do well, if they fail they fail,” said Nouriel Roubini, the New York University professor who predicted the financial crisis. “I’m less comfortable with using taxpayers’ money.”

To contact the reporter on this story: Liam Vaughan in London at lvaughan6@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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