Kramer quizzes Pearson on high frequency share trading

6.35.05pm GMT Mon 21st Dec 2009

• [Dec 15] Susan Kramer: If he will make an assessment of the merits of regulating the practice of high frequency share trading; and if he will make a statement.

Ian Pearson (Economic Secretary, HM Treasury; Dudley South, Labour)

High frequency trading practices and the firms that use them are subject to existing regulation, which includes provisions covering behaviour and market conduct. The Financial Services Authority will take action if those provisions are breached, and it continues to assess the risks from changing market practices, in consultation with other securities regulators.

Susan Kramer: The Minister will be well aware that nanosecond ownership of shares fundamentally changes the relationship between the shareholder and the board of directors, and therefore corporate governance. However, small firms that are, in a sense, not suitable for high frequency share trading will find it more difficult to raise equity capital, and such trading is related to a lot of activity that takes place off the exchanges in so-called dark pools. Does he not think that this at least deserves some detailed scrutiny and review before we walk into another disaster involving instruments that we do not understand?

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Ian Pearson (Economic Secretary, HM Treasury; Dudley South, Labour)

I agree with the hon. Lady that this needs detailed scrutiny and review. She might be aware of the paper that the Treasury issued on Friday entitled "Risk, reward and responsibility: the financial sector and society", which discusses a number of these issues. I am not sure that I agree with her point about liquidity and small companies, because there is evidence that high frequency trading is an important way of ensuring that there is additional liquidity. She will be aware, however, that the Committee of European Securities Regulators will be giving advice to the Commission next year on the review of the markets in financial instruments directive, which will certainly include the issue of high frequency trading and the nature of the changing equity market.

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