Britain's financial watchdog will investigate allegations that high frequency traders unfairly steal a march on rival investors as part of a broad "exploratory" review of competition in wholesale financial markets.
The Financial Conduct Authority (FCA) said it was concerned that the tactics used by some traders to beat rivals in the race for stock market information prevented new entrants from operating on a level playing field.
The review will also look more broadly at competition in wholesale banking – services provided away from the high street between banks and other types of financial institutions.
Mary Starks, director of competition at the FCA, said the watchdog had launched an exploratory exercise to determine where competition may be weak.
"And why is it important? Because wholesale financial markets play a crucial role in the economy, and the UK plays a key role in the international markets," she said.
The review comes more than five years after the Lehman Brothers crash exposed a web of complex relationships between banks and other financial institutions. Regulators at the time were fiercely criticised for failing to spot that much of the deal-making was for no purpose other than to ramp up profits, with retail investors and pension savers the ultimate losers.
High frequency trading has come under the spotlight in the US, largely in response to Michael Lewis's book Flash Boys, which documents how some firms have either located their servers in so-called co-hosting arrangements or laid dedicated fibre optic cables to exchanges to obtain a split-second lead on rivals.
Co-hosting is the name given to the practice of positioning servers inside existing exchanges to confirm trades and source sensitive information ahead of rival firms. The FCA said it wanted to assess concerns that this practice could exclude new entrants and harm competition.
Starks said that the FCA's remit to promote effective competition meant being proactive in rooting out competition issues rather than waiting for problems to occur.
Another area the FCA will look at is cross-selling and bundling of products and services, she said.
"The review describes various areas where this market feature might exist; from investment banking, to asset management, to trading venues and clearing houses that are vertically integrated," Starks said.
Some big investors have complained about not having a choice of clearing house for their derivatives transactions when they trade on a particular exchange, especially as new rules mean more trades must be cleared.
In place for only a year, the FCA was set up as part of George Osborne's post-financial-crisis shakeup of supervision to protect consumers better and increase competition in markets.
The latest inquiry follows the announcement by the chancellor of a "fair and effective financial markets review" last month, which will be carried out by the FCA, Treasury and Bank of England over the next 12 months.
The study will cover markets, their infrastructure, asset management and corporate and investment banking, but not credit rating agencies, payment systems or insurance, Starks said.
The review will also look at potential conflicts of interest in providing investors with the best share price in the market, and the underwriting of equity and debt.
The FCA is first asking for comment on potential competition issues from industry and the public until 9 October with a view to starting a detailed market study in early 2015.
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