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Securities regulators open scrutiny of technology impact on financial markets

July 7, 2011 - Securities regulators are to explore the feasibility of an overhaul of financial market reporting, audit and surveillance mechanisms in an effort to keep pace with the increasing volumes of data generated by technology-powered trading.

The International Organisation of Securities Commissions (Iosco) has flagged improvements in market surveillance as a critical element in a new consultation aimed at developing recommendations to mitigate the risks posed to the financial system by the latest technological developments, such as high frequency trading.

The Report (Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency) analyses the most significant technological developments that have arisen in financial markets in recent years, and their impact on market structure, participants' behaviour, price discovery and formation and also on the availability and accessibility of liquidity. It also considers other micro-structural related topics such as co-location, tick sizes, fee structures, indications of interest etc. and presents an analysis on trading control mechanisms.

In a letter to the Financial Stability Board outlining the report's content, Iosco highlights the challenges posed by the fragmentation of markets; the dispersal of trading information; the increased speed of trading; and the ability to gather and process the increased volume of trading data.

Iosco says regulators will likely require additional tools to deal with the challenges arising from market surveillance, some of which may include: additional audit trail or surveillance data consisting of all orders and trades by market participants in a given instrument; a single reporting point for all orders and for all transactions, by jurisdiction or geographical zone and across asset classes; and unique entity identifiers.

"Such tools could allow the proper treatment of data gathered from the market, giving regulators the opportunity to have access to orders and trades done, as well as to obtain market participants' information in a consistent manner," says the regulatory body.

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