Britain sponsors high-frequency trading study

By Huw Jones

LONDON, Nov 23 (Reuters) - Britain said on Tuesday it was backing a study of how high-frequency trading (HFT) may shape London as a financial centre over the next decade.

"The project will look ahead to developments in financial markets, with a prominent focus on high frequency trading," Britain's financial services minister Mark Hoban said in a speech.

HFT involves the use of computers by investors to dart in and out of markets and exploit tiny changes in share prices.

"The idea is to help us anticipate changes and provide us with the knowledge and evidence we need to help shape future directives," Hoban added.

HFT has grown sharply over recent years to account for about a third of trading volumes in Britain to about three-quarters of all share dealing in the United States.

The London Stock Exchange , which is losing market share to low-cost rivals, has hired a technology specialist to attract business from HFT firms.

Regulators are already worried about the fact that so much volume passes through just a few lightly regulated and thinly capitalised firms.

The UK study -- the latest in a series of Foresight projects under the umbrella of the government's business department, will look at how to avoid "technology-led economic instabilities".

The "flash crash" on Wall Street in May, when the Dow Jones index went briefly into freefall, also sparked regulatory concerns.

A group of experts will help guide the project, including Andy Haldane, director of financial stability at the Bank of England.

The European Union is already looking at whether its core MiFID share trading rules should be tightened and is expected to propose legislative changes next year.

But Hoban said it was vital the new EU regulatory framework recognises that greater use of technology can help to integrate the bloc's financial market.

The UK project will also look at how computer-generated trading will affect financial stability, share price formation and liquidity, competition, trading costs and the future role and location of capital markets.

The UK Financial Services Authority is due to give its latest thinking on HFT on Thursday.

Typically Foresight projects come up with policy options within 18 months to two years.