Gillian Tett on Hyper-Trading.

On paper, most of the financial innovations in the past two centuries could – theoretically – have encouraged greater patience. The creation of liquid and deep markets, for example, has enabled pools of capital to be deployed to promote long-term investment. Similarly, as corporate transparency has risen and information technology improved this has offered investors the ability to take well-informed, long-term decisions – if they choose.

But in practice innovation also has a darker, impatient side too: as markets have become deeper, and more liquid, that has enabled trading to become more frenetic; similarly, as information has become more frequently available, this has encouraged skittish, herd behaviour.

Thus investors are increasingly demanding quicker returns. Equity churning has grown: whereas the average holding period for US equity holdings was around seven years in the 1970s, it is now nearer to seven months.

That appears to have promoted more market volatility: though equity prices were twice as volatile as fundamentals back in the 1960s, they have become between six and 10 times more volatile since 1990, with numerous miscorrelations. And that in turn, has created a bitter irony, Mr Haldane argues: namely that while most of western society has long assumed that speed was tantamount to progress and efficiency, in truth these rising levels of speed, impatience – and short-termism – might have actually made the system less efficient, and rational than before......

To my mind, the real question which needs to be discussed – but which regulators are still ducking – is why ultra-fast trading is needed at all? What is actually gained by having deals struck at “one thousandth of a second”, as Ms Schapiro says? I would be interested to see some convincing answers.

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