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INTERVIEW-UPDATE 1-Regulators created high-frequency trading-LSE

Published 10/11/2010, 12:27 PM
Updated 10/11/2010, 12:32 PM

* Algorithms partly blamed for the U.S. flash crash

* British exchange wants to boost volumes from algorithms

(Adds background, detail)

PARIS, Oct 11 (Reuters) - High-frequency algorithmic trading is the creation of stock market regulators that wanted exchanges to compete with alternative venues in a fragmented marketplace, the London Stock Exchange's company said.

"It is not designed to provide liquidity. It is designed to provide synchronous trading in a fragmented environment," Xavier Rolet said of computer-based trading that has come to dominate trading volumes in Europe and especially in the United States.

"So, by definition this is a creation of the authorities," he told Reuters on the sidelines of a conference, referring to financial watchdogs on both sides of the Atlantic.

Algorithmic trading, whereby investment banks and hedge funds configure trading models to respond automatically to changing market conditions, has grown in the past 10 years to become the dominant source of liquidity for exchanges, such as the LSE, and alternative trading systems. While algorithms now account for more than 50 percent of activity on the largest U.S. and European trading venues, the practice has been called into question since the May 6 "flash crash" in the United States when the Dow Jones Industrial Average fell over 800 points in a matter of minutes.

U.S. regulator the Securities and Exchange Commission said in an Oct. 1 report on the matter that an algorithm deployed by a mutual fund triggered the crash.

The LSE last week upgraded the technology that underpins its pan-European system Turquoise to make it faster and more attractive to high-frequency algorithmic traders. (Reporting by Jonathan Spicer: Additional writing by Luke Jeffs; Editing by Dan Lalor)

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