A government-sponsored independent review into the performance of UK equity markets has encountered deep scepticism among asset managers of the wisdom of opening national stock markets to competition and scathing criticism of the role played by high frequency traders in distorting market values.
The review, undertaken by John Kay, was commissioned by the UK Secretary of State for Business, Vince Cable, in June 2010, with a brief to examine the way investors, shareholders, regulators and the boards of UK quoted companies "can best serve the long-term interests of British business and the economy".
The interim report, published today, uncovered a wistful longing for the simpler pre-MiFID days of a dominant domestic stock market operating to serve the needs of market participants in the first instance and then the economy more generally.
Royal London described its experience as one in which "exchanges have shifted to being commercial activities rather than being organisations owned by users so the incentives have changed and finding ways of encouraging and facilitating greater trading is seen as an end in itself".
Many respondents were also vehemently critical of high frequency trading, pointing to increased volatility and casting doubts on proponent's claims that HFT injects more liquidity into market.
A representative comment was made by Aviva: "While some argue that spreads have reduced as a result of this (HFT) activity, in reality the extent and depth of liquidity they really represent is questionable".
While the tone of submissions was hostile to high frequency trading, there were few suggestions as to how the volume of such trading might be reduced or the activities of high frequency traders restricted. One proposal was that orders, once placed, might be required to rest for a minimum period of time.
A recent preliminary report by the UK Government's Foresight panel into computer-driven market trading found no direct evidence that high frequency trading has increased volatility, but noted that self-reinforcing feedback loops in automated trading programs can lead to significant instability as undesired actions and outcomes are amplified.
The full conclusions of the Foresight study, along with recommendations will be released in Autumn 2012. The Kay panel says it will frame its assessment in light of those conclusions.
Measures to curb the worst excesses of high frequency traders are being implemented across Europe, meanwhile, with both Deutsche Bourse and Borsa Italiana planning to penalise traders for quote stuffing, and France plotting the introduction of a financial transaction tax.