Artificial intelligence is fundamentally altering how Britain's financial markets operate, with new data showing that algorithmic trading systems now account for over 70% of all equity trades on the London Stock Exchange. The shift has brought measurable gains in market efficiency: average bid-ask spreads on FTSE 100 stocks have narrowed by 12% over the past 18 months, according to exchange data, meaning lower costs for institutional investors and pension funds.
However, the rapid adoption of AI trading tools has also sparked debate about whether faster pricing comes at the cost of stability. The FTSE 100 closed yesterday at 8,243.67, down 0.3% on the day, as an AI-driven sell-off in tech stocks briefly wiped £2.3bn from the index before recovering within minutes. 'We are seeing markets that can absorb information almost instantaneously, but that also means they can overreact to noise,' said Dr Eleanor Marsh, a market microstructure researcher at the University of Cambridge.
For UK retail investors and pension holders, the implications are mixed. Lower transaction costs and tighter spreads benefit long-term savers through reduced fund charges. Yet the Bank of England has warned that AI systems, which often rely on similar datasets and algorithms, could trigger synchronised selling during a downturn—a risk highlighted in its latest Financial Stability Report. The regulator is consulting on new 'algorithmic resilience' requirements for firms using AI in trading.
Sector-level analysis shows that AI's impact varies. High-frequency trading firms have seen profit margins squeezed as competition intensifies, while traditional asset managers are investing heavily in their own AI models to keep pace. 'The arms race is real,' noted James Harding, head of equity strategy at a London-based brokerage. 'Firms that cannot adapt risk being left behind, but those that do may introduce new fragilities.'
The debate also touches on market fairness. Critics argue that AI systems give large institutions an information advantage over individual investors, even though the technology has democratised access to real-time data. 'Efficiency and fairness are not the same thing,' said Sarah Patel, a policy analyst at the New Economics Foundation. 'We need to ensure that AI doesn't create a two-tier market.'