Financial Markets and High Frequency Trading: An Information Management Perspective

Abstract

The advances in trading technologies and networking infrastructures combined with the globalisation and competitive environment of the financial markets has increased the complexity and dynamics of markets making them difficult to understand and has raised a number of issues in relation to the adequacy and appropriateness of the regulatory frameworks.

This report examines the findings of the Foresight project on the Future of Computer Trading in Financial Markets in relation to the costs, risks and benefits of the possible regulatory measures which are currently being considered as part of the European Union’s Markets in Financial Instruments Directive 2, also known as MiFID II.

We argue that the measures discussed do not cover completely the complexity of the issues that need to be examined, the measures discussed can be seen as fine-tuning actions that might have a higher risk of unintended consequences and domino effects, and it is better to re-examine financial markets from ground-up and be prepared to make suggestions and recommendations based on experience from related domains and intuition rather than evidence based only on peer review research.

More specifically, we propose an information management perspective to examine financial markets and identify a number of areas that need to be examined by drawing parallels with other man-made systems that we believe provide useful insights. Finally, the report attempts to contribute to a wider understanding of the issues that financial markets currently face and help with their understanding and regulatory measures that could be examined.

Keywords: financial markets, high frequency trading, MiFID, racing