CONTRACT FOR THE PROVISION OF SERVICES TO THE
DEPARTMENT FOR BUSINESS INNOVATION AND SKILLS
(BIS REF NO: NG 087)
This Contract is dated
1.
and is made between:-
The Secretary of State for Business Innovation and Skills on behalf of
the Crown (the “Authority”) of 1 Victoria Street, London SW1H 0ET;
and
2.
Michael Aitken (the “Contractor”) whose registered office is c/o Room
330, Australian School of Business, UNSW Sydney NSW 2052 Australia.
INTRODUCTION
(A)
On 3 December 2011 the Authority issued an invitation to quote for the
provision of paper for the Future of Computer in Financial Markets
Foresight Project this including the specification a copy of which is set out in
Schedule 1 (the “Specification”).
(B)
In response the Contractor submitted a proposal dated 5 December 2011 and
entitled “The Impact of Market Design Changes (in particular High Frequency
Trading) on Market Quality”, explaining how it would provide the services a copy of
which is set out in Schedule 2 (the “Proposal”).
(C)
The Specification and the Proposal were supplemented by the
correspondence copies of which are set out in Schedule 3 (the
“Correspondence”).
The parties agree as follows:1.
SUPPLY OF SERVICES AND PRICE
In consideration of payment by the Authority to the Contractor of the sum of
£ 40,000 (exclusive of Value Added Tax) (the “Contract Price”) and in
accordance with (a) the Specification; (b) the Proposal; and (c) the Authority’s
Standard Terms and Conditions of Contract for Supplies/Services (the
“Standard Terms”) the Contractor shall provide the Services described in the
Specification and the Proposal and the Correspondence to the Authority. In
detail, Foresight has agreed to pay £20,000 for a paper on market abuse
focusing on the London market plus another £20,000 for another paper
focusing on Paris using more detailed data. The deadlines for receiving both
papers are the same one as specified in this contract.
2.
COMMENCEMENT AND CONTINUATION
Contract
PF41
This contract shall commence on 7 December 2011 and subject to any
provisions for earlier termination contained in the Standard Terms shall end
on 1 May 2012.
3.
TERMS AND CONDITIONS
3.1
The Standard Terms shall form part of this Contract. In the event of conflict
between these clauses and the Standard Terms, these clauses shall prevail to
the extent of the conflict.
3.2
The Contractor’s Standard Terms and Conditions of business shall not apply
to this Contract.
3.3
This Contract is formed of these clauses and the Schedules hereto. Any other
attachments are provided for information purposes only and are not intended
to be legally binding.
4.
CONTRACTOR’S OBLIGATIONS
4.1
Where the Contractor is supplying goods to the Authority these shall be
delivered to the Authority in full compliance with the Specification and shall
be of satisfactory quality and fit for purpose. Where the Contractor is
performing services for the Authority it shall do so in accordance with the
Specification and exercise reasonable skill and care.
5.
MANAGEMENT AND COMMUNICATIONS
5.1
The Contractor shall perform the Services under the direction of the
Authority.
5.2
Any direction by the Authority may be given by Lucas Pedace (the “Contract
Manager”) who is an officer in the Authority’s Government Office for
Science, BIS, 1 Victoria Street, London, SW1H 0ET or such other person as
is notified by the Authority to the Contractor in writing.
5.3
The Contractor appoints Michael Aitken to be the Contractor’s first point of
contact for this Contract. All queries to the Contractor from the Authority’s
Contract Manager shall initially be addressed to the Contractor’s first point
of contact.
5.4
The Contractor’s first point of contact and the Contract Manager shall meet
as often as either the Contractor or the Authority may require, to review the
Contractor’s performance of the Contract.
6.
INVOICES AND PAYMENT
6.1
Subject to the Contractor providing the Services to the Authority in
accordance with this Contract and submitting invoice/s to the Contract
Manager in the manner reasonably required by the Contract Manager
payment will be made by the Authority to the Contractor in accordance with
clause 11 of the Standard Terms.
Contract
PF41
Signed by the parties’ duly authorised representatives:For the Secretary of State for Business Enterprise Innovation and Skills on behalf of
the Crown
Signature: ………………………………………………
Print Name: ………………………………………………
Job Title: …………………………………………………
Date:……………………………………………………..
For the Contractor
Signature: ……………………………………………….
Print Name: ……………………………………………….
Job Title: ………………………………………………….
Date: ………………………………………………………
The following Schedules form part of this Contract:
Schedule 1
Schedule 2
Schedule 3
Contract
The Authority’s Specification
The Contractor’s Proposal
The Correspondence
PF41
Schedule 1
Specification for Driver Reviews
This Foresight Project1 will unfold in three phases:
o
Phase 1 ‘Understanding what is happening’: (November 2010 – July 2011):
drawing on the best available evidence to evaluate how computer generated trading
may evolve in the next 10 years and how these developments will impact upon
financial markets. Driver reviews fall under this phase.
Phase 2 ‘Refining understanding and addressing the challenges/ opportunities’
(July 2011 – March 2012): identifying and assessing options for addressing the most
important challenges and opportunities identified in Phase 1.
o
Phase 3: report production (March 2012 – October 2012).
Structure of your driver review
Time frame:
You should consider how your driver might develop over the next ten years.
Considering the driver in the future:
At least one third of your driver review should focus on the future. A maximum of one
third can focus on analysis of the past. Analysis should be evidence based.


Deliverables
An interim report outlining early findings by 1 April 2012 is required to inform early
synthesis of evidence.
The final review papers will be 5,000-10,000 words in length each in Microsoft Word
or similar (excluding diagrams and source references). All diagrams that have
copyright must have copyright permissions cleared. Final versions (following peer
review) to be received by 1 May 2012.
The authors are to refrain from including any policy recommendations.
Peer review
Foresight will arrange for your review paper to be peer reviewed by two independent
experts. You are asked to address the peer review comments as you see fit.
Style
Insofar as it is possible, the review should be written is a way that would be
understandable to experts outside of your field – the leading experts will need to
synthesise the content of many diverse reviews from different fields (e.g. Computer
Science, Sociology, Economics).
A ‘style guide’ will be provided which you are asked to use. This will help government
officials considerably when drafting the final report with the lead experts by ensuring
that all of the reviews have the same look and feel – and it will minimise any
subsequent changes that we propose to your draft.
Publication
1
For more info go to: http://www.bis.gov.uk/foresight/our-work/projects/current-projects/computertrading
Contract
PF41
The intention is to make papers publicly available. It is also the intention that the
review will also be available on a CD as part of the project outputs.
Foresight will also seek publication of the driver reviews in a prestigious learned
journal (possibly an economics one). This cannot be confirmed at this stage, but it is
our intention. It should be noted that a learned journal may impose additional
requirements. In this case we will seek to agree those with you.
Most importantly, you are asked not to publish or make your reviews generally
available before the launch of the Foresight Project findings without the agreement of
Foresight officials.
Contract and payment
The Department for Business, Innovation and Skills standard conditions of contract
will be used.
The fee will be calculated based on a maximum of £400 per day of work required to
complete the driver reviews. The number of days expected to complete the work
should be agreed with the Lead Expert Group member/Foresight before work begins
and this fee will then be fixed.
The fee payable for your reviews will be paid in two instalments based upon two of
the project milestones outlined under the subtitle Deliverables above:
 50% upon receipt of a satisfactory interim report;
 50% upon receipt of the final draft of your paper following peer review.
We are willing to consider alternative arrangements if you consider that you have
completed a high proportion of your work early.
Next steps: agreement of work through proposal
Your proposal
Please provide an outline proposal of your approach to the reviews. It is expected
that this outline will be 1-2 pages. This should include:
o The questions/issues you will cover;
o How you will ensure methodological quality in your reviews? How will you assess
the quality of the evidence you use in your reviews? Which data sources might
you use (if appropriate)?
o Whether you will involve any other experts or colleagues in the work2 (if so please
provide their brief CV);
o The anticipated length of the reviews if you propose to depart from the 500010000 word guideline;
o Your proposed fee; please provide a breakdown of resources/costs required for
each task.
Once we receive your proposal, and agree a fee, we will send a contract for
signature and issue an instruction to proceed.
2
Foresight is particularly keen to involve leading experts from centres of excellence,
wherever they are based around the world
Contract
PF41
Annex A: Style guide for authors (subject to change)
As the Foresight Future of Computer Trading in Financial Markets Project will
commission a substantial number of science reviews and technical papers, it
is desirable that these are produced in a similar style wherever possible.
The project team would appreciate authors using the following style guidelines
as far as possible when writing their reviews for the project.
Further advice on the following guidelines may be obtained from Lucas
Pedace (020 7215 3247; [email protected] and Luke Ryder (0207
215 3989; [email protected]).
Format
Version control
Text
References
All documents to be provided electronically in Word
format, or similar
Please do not submit documents in PDF format, or use
templates that are particular to your own organisation.
Your text should be marked ‘DRAFT’ on each page,
and the date of the version inserted on the front page.
Pages should be numbered, with the title page being
number 1.
Centre justified
1.5 line spacing used
Paragraphs should not be numbered
Whilst you are encouraged to use references to
establish the credibility of your review/paper, and to
embed it in the wider literature, please avoid inserting
multi-page bibliographies.
Most importantly, please ensure that all references are
provided in full in a list at the end of the main text. They
should be placed in alphabetical order of surname of
first author. This list should be entitled ‘References’.
Every reference in the list should be cited in the main
text, and vice versa.
Referencing in the body of the text should be in the
Harvard style: the name of the first author and the year
of publication –e.g. Jones (2004)
Capitalisation and punctuation of references in list to be
consistent with the follow examples:
Ausden, M. and Hirons, G.J.M. (2001) The effects of
flooding lowland wet grassland on soil
macroinvertebrate prey of breeding wading birds.
Contract
PF41
Journal of Applied Ecology 38, 320-338
Intergovernmental Panel on Climate Change (2000)
Special Report on Emmissions Scenarios (SRES): A
Special Report of Working Group III of the
Intergovernmental Panel on Climate Change.
Cambridge University Press: Cambridge, UK
Images, figures and
data
The author of the review must secure authorisation for
use of any images, figures or data, before final draft
stage is reached.
Any images used should be of a standard suitable for
high-quality printing, and in jpeg format if at all possible.
All tables, charts, images and figures to be numbered in
consecutive order of appearance under the title: Figure
1, Figure 2 etc.
All titles of figures to be in bold with capitalisation and
punctuation as shown:
The reviews will not include ‘fold-outs’ or similar,
therefore all tables, charts and text should not exceed
‘A4’ size.
If you wish, you can provide all the images and figures
together in a separate file, or attached to the end of
your text. However, your text should make clear where
each figure should be inserted – and the titles of each
figure (in the correct format) should accompany each
figure.
Title page
A template for the title page will be provided
Acknowledgements
Acknowledgements should be on page 2
Footnotes and
endnotes
Footnotes and endnotes should be avoided if possible
Contract
PF41
Schedule 2
Title:
The Impact of Market Design Changes (in particular High Frequency Trading) on
Market Quality
Lead authors:
Professor Michael Aitken (University of New South Wales in Sydney), Professor
Doug Cumming (York University, Canada), Professor Frederick deB. Harris (Wake
Forest University, USA), Professor Thomas McInish (University of Memphis), USA
Additional authors:
Outline:
Stakeholders within the financial community (regulators, exchanges, financial
intermediaries and traders) motivate changes in market design3 from time to time.
Recent high profile changes include the introduction and exponential growth of
High Frequency Trading and Dark Pools, bans on short selling the introduction of
circuit breakers and a range of initiatives to do with market
fragmentation/consolidations. Securities regulators are required to sign off on these
changes according to their published mandates which highlight two key objectives,
namely, efficiency and integrity4. Like all market design changes, high frequency
trading must enhance and certainly not detract from the efficiency and integrity of
markets5. Although much work has been done on efficiency, little if any work has
been done in the area on market integrity, or the interplay between the two, which
forms a key element of this proposal.
While regulators have invariably undertaken wide consultation on the proposed
market design changes, seeking evidence from would-be responders, the lament of
the entire financial services industry is the lack of evidence provided with responses
and in turn the lack of evidence based policy making. Addressing these concerns, our
work develops a market quality framework within which both efficiency and
integrity are defined and measured. Three metrics of efficiency (representing
transaction costs and price discovery) and of integrity (insider trading, market
manipulation, broker client conflict) have been developed and are capable of
measurement for any market in the world using either confidential data from each
market or the Reuters Tick Data History service, the later of which was developed
by a consortium including the lead authors.
Using a set of three structural equations, representing market efficiency and market
integrity, and a focal market design change of particular interest to the client, this
framework enables one to investigate the effects on efficiency and integrity of any
market design change. For example we can investigate the impact of high frequency
trading on both market efficiency and market integrity, and as important the
interplay between the two. In a recent paper by two of the lead authors we show that
the ability to manipulate the market is directly related to the cost of trading.
Markets that are more easily manipulated are 31-59 basis points dearer to trade
3
Changes include changes in technology, regulation, information, participants and instruments.
See the published mandates of most major markets as outlined on their respective websites or refer
the IOSCO’s statement on “Objectives and Principals of Securities Regulation” (see
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD266.pdf. )
5 Additional metrics representing systemic risk, a recently added objective to IOSCO’s list (see
footnote 2 above), are currently in development.
4
Contract
PF41
in6.The authors will as part of the work also calibrate the effect of reduced or
enhanced integrity on market efficiency addressing the possibility of a tradeoff
between integrity and efficiency. The ideal outcome of a market design change is an
enhancement in both efficiency and integrity. The next best alternative is an
enhancement in one without impairment to the other. Sub-optimal outcomes lead to
an increase in one but a reduction in the other or worse, a reduction in both.
The objective of this work is to use our market quality framework to address the
high frequency trading issue, both to find the results for HFT and to show the value
of such a framework more generally.
Questions and Issues Addressed:
Given the particular market design change chosen by the client how did the
introduction of that design change affect the integrity and efficiency of the markets
in which it is introduced.
How do international markets compare at a point in time and over time on the key
attributes of efficiency and integrity.
What are the US dollar estimates of insider trading and market manipulation in each
marketplace?
What are the differences in transaction costs and price discovery across markets?
How do market efficiency and market integrity interact/tradeoff?
Length of the Report:
1500-2000 words per market
Number of Days required:
50 days per market per market design change investigated.
References:
Aitken, MJ and FHB Harris , Evidence-Based Policy Making for Financial Markets: A Fairness and
Efficiency Framework for Assessing Market Quality, Journal of Trading, Summer 2011, vol. 6, no.3, pp.
22-31
(This paper provides more detail on the Market Quality Framework developed by the research team
including a description of the $40m infrastructure developed by the CMCRC and available to the
work).
Aitken, MJ and FHB Harris, Trade-Based Manipulation and Market Efficiency: The Effect of Market
Design, Working paper, CMCRC 2010.
(This paper provides empirical evidence from 25+ markets that markets that are more easily
manipulated are more costly to trade in, the introduction of real-time surveillance systems
(specifically SMARTS) reduces both the cost of trading and enhances market integrity.)
Aitken, MJ, Di Marco, EM, and Harris, FHB, Price Discovery Efficiency and Information Impounding on
NYSE Euronext Paris, Working paper, CMCRC 2011.
(This paper develops evidence of the price discovery efficiency of the MTFs Chi-X and BATS post MiFID
despite a minimal loss of permanent information impounding by the primary exchange NYSE Euronext
Paris.)
6
See Aitken, MJ and FHB Harris, Trade-Based Manipulation and Market Efficiency: The Effect of
Market Design, Working paper, CMCRC 2010.
Contract
PF41
Cumming, D. Johan, S and D Li, Exchange Trading Rules and Stock Market Liquidity, Journal of
Financial Economics, February, 2010. Available at: http://ssrn.com/abstract=1545988
(This paper shows that differences in market design as reflected in regulations across markets affects
the efficiency of markets.)
Upson, James, and Thomas McInish, 2011, Strategic Liquidity Supply in a Market with Fast and Slow
Traders, Presented at the National Bureau of Economic Research, Cambridge, MA, December 2011.
(This paper addresses a common problem faced by traders around the world, which is that some
traders have higher latency than others so that the low latency traders can take advantage of the high
latency traders. Studying this problem in the context of the Flicker Quote Exception to the Order
Protection Rule (SEC Rule 611) that permits exchanges to execute orders at prices inferior to the
NBBO as long as the prices were at the NBBO within the last one second, the paper finds that in the
U.S. fast traders earn $281 million per year at the expense of slow traders.)
Schedule 3
Dear Lucas.
I have been looking at these issues in a little more depth since your last email and have
become concerned about the general lack of quality data available for this purpose.
Even though we have intraday trade and quote information (via Reuters) for all the relevant
markets I do not think that this will enable us to produce much more than is out there
already because it relies upon too many assumptions in relation to the progress of HFT over
the last few years. One needs to use proxies like the size of trades and the number of order
updates.
I have recently secured full order book data from NYSE-Euronext in Paris and have a request
into Denzil Jenkins at the LSE to try and access the same from them which would include
broker identified data to enable us to build better proxies for HFT.
We can of course do the work with the usual proxies but I feel we may not achieve much
more than is already in the literature accept of course we do have the integrity proxies and a
correlation of the old HFT proxies with integrity proxies would be new.
I wanted to discuss this with you before proceeding further. Can we have a chat in the next
couple of days.
Cheers
Mike A
Michael J Aitken
Chair of Capital Market Technologies - University of NSW (www.unsw.edu.au)
Chief Scientist - Capital Markets Cooperative Research Centre (www.cmcrc.com)
Ph. +61 2 8088 4210 (fixed)
Ph +61 402 838 213 (mobile international)
Ph 0402 838 213 (mobile local)
Contract
PF41
From: Pedace Lucas (GO-Science) [mailto:[email protected]]
Sent: Saturday, 28 January 2012 3:49 AM
To: [email protected]
Cc: Davenport Piers (GO-Science)
Subject: FW: Aitken contract- 20K
Michael,
Please find enclosed the contact for your work. Please confirm you are happy
to get £20,000 pounds for this work and submit a first version of your paper to
be peer reviewed by 1 April.
Lucas
Lucas Pedace | Project Leader | The Future of Computer Trading in
Financial Markets
Government Office for Science | 2nd Floor, 1 Victoria Street, London
SW1H 0ET | 020 7215 3247 | 07584006772 | [email protected]
New 2-minutes video: http://www.bis.gov.uk/foresight/ourwork/projects/current-projects/computer-trading
<<Contract for Michael Aitken assessment ~ Computer Trading in Financial
--From: Pedace Lucas (GO-Science) [mailto:[email protected]]
Sent: Friday, 16 December 2011 2:40 AM
To: [email protected]
Cc: Davenport Piers (GO-Science); Griffin Chris (AMS); [email protected]
Subject: Re: British Treasury Project on HFT
Mike,
In your proposal you state:
"50 days per market per market design change investigated."
Would it be possible just to focus on HFT and market abuse (eg how market integrity has
been affected with the advent of HFT)?
Happy to talk about this if it is more convenient- given the time difference I can call you until
9:30pm London time.
Would be good to sort this asap so you can start work given that the first deadline to submit
would be 2 April.
Contract
PF41
Lucas
From: Pedace Lucas (GO-Science)
Sent: 07 December 2011 06:59
To: [email protected]
Cc: [email protected]
Subject: Re: British Treasury Project on HFT
That is perfect. Please include cover UK, France and Germany. Is there any other EU market
you might want to also include due to the levels of HFT? Netherlands?
Once we receive the reply we can proceed to send you a contract.
From: Michael Aitken [mailto:[email protected]]
Sent: Wednesday, December 07, 2011 02:41 AM
To: Pedace Lucas (GO-Science)
Cc: [email protected] <[email protected]>
Subject: RE: British Treasury Project on HFT
I can focus on any market or markets you care to nominatemy infrastructure will handle
allows me to address any world market including all European markets.
From: Pedace Lucas (GO-Science) [mailto:[email protected]]
Sent: Wednesday, 7 December 2011 9:55 AM
To: [email protected]
Cc: [email protected]
Subject: Re: British Treasury Project on HFT
Dear Professor Aitken,
Success: the leading experts involved in this project want to commission your proposal.
However Dame Clara Furse asked if you could focus your research on European markets (e.g.
London or Paris).
Grateful if you could please let me know if that would be possible.
Best,
Lucas
Lucas
From: Michael Aitken [mailto:[email protected]]
Sent: Monday, December 05, 2011 09:32 PM
To: Pedace Lucas (GO-Science)
Cc: [email protected] <[email protected]>
Subject: RE: British Treasury Project on HFT
Dear Lucas,
Here is my proposal.
Not sure whether you want CVs of the various parties. Happy to supply if necessary.
In connection with the Market Integrity issue perhaps suffice to say that I was the founder
and chief financial architect of the SMARTS product (www.smartgroup.com), a real time
surveillance system now in use in 40 national exchanges and regulators and 200 brokers
across 40 countries. I sold SMARTS to Nasdaq-OMX Technologies last year.
Cheers
Contract
PF41
Mike A
From: Pedace Lucas (GO-Science) [mailto:[email protected]]
Sent: Saturday, 3 December 2011 7:25 AM
To: [email protected]
Cc: [email protected]
Subject: Re: British Treasury Project on HFT
Dear Professor Aitken,
I am glad to hear that. Thanks for letting me know.
Best,
Lucas
From: Michael Aitken [mailto:[email protected]]
Sent: Friday, December 02, 2011 08:10 PM
To: Pedace Lucas (GO-Science)
Cc: Yasmin Hossain <[email protected]>
Subject: RE: British Treasury Project on HFT
Dear Lucas,
Thank-you for your email. I will submit a brief proposal by your time Monday 5 December.
Cheers
Mike A
Michael J Aitken
Chair of Capital Market Technologies - University of NSW (www.unsw.edu.au)
Chief Scientist - Capital Markets Cooperative Research Centre (www.cmcrc.com)
Ph. +61 2 8088 4210 (fixed)
Ph +61 402 838 213 (mobile international)
Ph 0402 838 213 (mobile local)
From: Pedace Lucas (GO-Science) [mailto:[email protected]]
Sent: Saturday, 3 December 2011 1:01 AM
To: [email protected]
Cc: Yasmin Hossain
Subject: British Treasury Project on HFT
Importance: High
Dear Professor Aitken,
My name is Lucas Pedace, I am a senior British Treasury economist leading a
project on the future of computer trading.
For further information about this project please visit:
http://www.bis.gov.uk/foresight/our-work/projects/current-projects/computertrading
In order to inform the European Commission and the EU Parliament during
the forthcoming debate about the policy options to be enacted through
legislation on computer trading, the group of experts involved in this
International project ( http://www.bis.gov.uk/foresight/ourwork/projects/current-projects/computer-trading/lead-expert-groupis) is aiming
to commission economic regulatory impact assessments on different possible
measures from leading academics.
Contract
PF41
Your name has been put forward by Alex Preda (whom I recently met) as a
potential author of an economic regulatory impact assessment on market
abuse surveillance.
If you are interested in writing this study, for which you would be paid 400
British pounds per day, please fill in the attached document entitled
"proposal". Also see the other two attached documents for reference. I would
be very grateful if you could send this by close Monday (so our leading
experts can discuss if they want to commission this proposal at the next
meeting at the Bank of England on 6 December)
Apologies for the short notice.
Kind regards,
Lucas
Contract
PF41