Trading without judgement: An interview with Adair Turner

“The likelihood that high-frequency trading is socially valuable is nil,” says the financial policy expert
April 23, 2014

“Nobody can describe why getting the process of… trading down from the minute-by-minute level to the nanosecond level can possibly deliver value.”

Adair Turner, the former Chairman of the Financial Services Authority, the body that up until 2013 was responsible for regulating the City, has described the controversial financial activity of high-frequency trading as having “no positive value.” Turner told Prospect that “the likelihood that high-frequency trading is socially valuable is nil.”

These comments come after the recent publication of Flash Boys, by Michael Lewis, which describes the methods used in high-frequency trading, where firms buy and sell shares at ultra-high speeds using complex computer algorithms. The practice is extremely lucrative—and controversial.

Lewis suggests that high-frequency traders (HFTs) have “rigged” financial markets by gaining access to price information a fraction of a second before all other investors. HFTs place their computers as close as possible to the buildings that house stock market servers, allowing them to scan information coming into a stock exchange and exploit that fraction of a second during which they know what the rest of the market does not. These revelations have outraged politicians and regulators in the US and around the world.

“Nobody can describe why getting the process of… trading down from the minute-by-minute level to the nanosecond level can possibly deliver value,” says Turner. Stock markets are intended to reflect the judgement of investors. The only way in which financial activity can deliver value is if it makes investors “better [at] working out whether company X is better than company Y.”

But HFTs reduce the scope for such assessments. They operate in increments of time that are beyond human perception. A human blink takes between 100-400 milliseconds; American HFTs can now send their trading instructions from Chicago to New York in eight. “You get to a point with a frequency of trading where it is quite clear that it cannot have anything to do with judgement,” says Turner. “Once you are down at the nanosecond level it can only be one computer observing that another computer has placed an order, responding algorithmically to the assumption of what that will do.”

As to whether HFTs pose a threat to financial stability overall, and whether buying and selling large numbers of shares at very high speed causes destabilising financial pressure—volatility—Turner notes that this “argument is hugely debated in the economic literature.” His sense is that “there is at least a possibility that more trading induces more volatility, but it is not absolutely certain.”

High-frequency trading and its consequences are not new. The so-called “flash crash,” during which the Dow Jones index of stocks lost over 1,000 points in a fraction of a second, occurred four years ago. The HFT sector is the subject of scrutiny by bodies in the US, including the FBI, which started its investigation last year. The Securities and Exchange Commission has been looking into HFT since 2010 and the New York Attorney General has made clear for some time his intention to bring change. The European Commission has also recently put forward regulations to limit its activities.

Why have these investigations taken so long? “All issues of enforcement take what to the external world are unbelievably long periods of time,” says Turner, who was the chief City regulator when the news broke that financiers in London had been manipulating a key interest rate—Libor.

“When we came out with the Libor stuff in the summer of 2012, people said ‘hang on, this relates to stuff back in 2008. Why has it taken you four years?’ Well it just does,” says Turner. “It takes enforcement agencies time to work out whether there is a prima facie case to look at.”