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Algorithmic Trading May Spur Volatility, Mispricing, Turner Says

The rise of algorithmic trading may cause markets to be more volatile and securities to be mispriced, Adair Turner, chairman of the U.K.’s Financial Services Authority will tell a U.S. audience today.

Regulators should also question whether high-frequency trading “can possibly deliver significant positive social value” by pricing securities at intervals of nano-seconds, Turner will say, according to prepared remarks for a speech at Johns Hopkins University in Baltimore. “There must be at least some danger” the rise of computer-driven trading results in increased volatility, according to Turner.

High-frequency traders have come under increased regulatory scrutiny following the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. A proposed European tax on financial transactions could cut high-frequency trading by as much as 90 percent “in some market segments,” Manfred Bergmann, a European Commission official, said last year.

It’s unclear what “positive social value high-frequency trading delivers, and if it delivers no value, but makes its individual traders richer, then some subtle and unnecessary rent extraction process is at work,” Turner said in the speech text provided by the FSA.

The practice is used in strategies where how fast a trade is executed may be critical to profitability, which include electronic market making and statistical arbitrage.

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