Technology in markets

About our research

In the modern trading environment, a trading strategy is typically executed by one or several algorithms. Such algorithms are responsible for the analysis of data, the initiation of trading instructions, communication with one or more trading platforms, and the confirmation of trades.

Originally, algorithmic trading came with the promise of using faster and cheaper technologies to drastically lower execution costs and improve price discovery for fundamental market participants. For small infrequent investors who want to buy or sell one hundred shares of a liquid stock or a couple of futures contracts, this promise seems to have been realized – they can trade at narrower bid-ask spreads, greater market depth, and prices that can be discovered around the clock. For everyone else, market quality has become an on-going concern. High frequency and low latency traders take advantage of anyone trying to trade in size. Liquidity is being fragmented into divergent pools operating under different matching protocols and flash events rattle major financial markets on a regular basis.

Technology in markets.

These concerns have been met with a wide range of proposed policy and regulatory responses. Yet most, if not all, of these regulatory and policy proposals address only the symptoms of a much deeper problem – the fact that global financial regulatory framework has become antiquated and obsolete in the face of rapid technological advances that drastically reduced costs to intermediation, but have not correspondingly increased or distributed the benefits of greater immediacy.

In the UK and Europe, the most recent sweeping regulatory response is the revised Markets in Financial Instruments Directive (MiFID II). MiFID II went into effect on the 3rd January 2018 across the European Union (EU). The Directive set out rules and requirements aimed at making automated financial markets for EU securities more transparent, as well as at strengthening investor protection. Yet, post-MiFID II, the trading architecture in Europe has become much more complex. In addition to multiple pan-European and national exchanges (lit venues), securities in Europe can also be traded on multiple dark venues, over the counter (off-book), via large-in-scale auctions, as well as through systematic internalisers.

The Centre identifies key policy and regulatory questions in the intersection of digital technologies and regulated financial markets for securities and derivatives, conducts high quality academic research, communicates results back to the industry and regulators via outreach in the form of conferences, workshops and visits, and incorporates the acquired knowledge into both degree and Executive Education programmes.

Questions and initial areas of research

  • Has liquidity in European equity trading post-MiFID II become fragmented across many different matching protocols with significant differences in pre and post-transparency requirements?
  • Have any types of trading mechanisms disproportionally gained or lost market share post-MiFID II?