Around one third of share trading in the UK is conducted by computers fulfilling commands based on complex algorithms, said the Foresight panel in a working paper published yesterday.

Nevertheless, this proportion is significantly lower than in the US, where three-quarters of equity dealing is computer generated.

The Foresight panel, led by Dame Clara Furse, the former chief executive of the London Stock Exchange, argued that there are both benefits and severe risks to algorithmic trading.

There was "no direct evidence" that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with "undesired interactions and outcomes" to occur and cause massive damage.

One such event is self-reinforcing feedback loops, whereby small changes, perhaps driven by data delays or news events, loop back on themselves and trigger a bigger change, which again loops back. Another event, normalisation of deviance, is more psychological: unexpected and risky events come to be seen as ever more normal until a stock market crash occurs.