This review was commissioned as part of the UK Government’s Foresight Project, The Future of Computer Trading in Financial Markets. The views expressed do not represent the policy of any Government or organisation.

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J. Doyne Farmer
Santa Fe Institute

Spyros Skouras
Athens University of Economics and Business

Abstract

We adopt an ecological microstructure perspective of financial markets and use it to consider the impact of computer trading on the fairness, competitiveness and stability of markets now and in the future. The ecological perspective is particularly appropriate for computer trading because it has increased specialization and has made the behaviour and interactions of agents in the market much more systematic and measurable than when trading based on human judgment was dominant. We view regulatory policy as a key element of the ecology itself and a key driver shaping markets of the future. After reviewing a number of important trends in market ecology, we conclude that immediate regulatory initiative is necessary for careful measurement of market ecology with the related goals of (1) developing real-time warning signals for systemic risk; (2) informing an evidence-based approach to systemic stability policy and to competition policy that properly accounts for the multi-platform nature of modern financial markets; and (3) building a deeper theoretical understanding of markets based on large-scale simulations.