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Council calls for controls on high-frequency operators

19 Dec 2012 THE AGE
BY PETER TRUTE


HIGH-FREQUENCY trading is not a threat to the integrity of Australian sharemarkets at present, but must be kept under control by new regulations, a report has found.

The report, commissioned by the Financial Services Council of Australia, is the first formal examination of the impact of high-frequency, computerised securities trading on "buy-side" operators - such as superannuation and managed investment funds - in Australian capital markets.

It also examined the impact of so-called "dark pools" - share transactions that are conducted away from the main exchanges and so are not visible to the broader market.

ASIC last month announced new market integrity rules for high-speed traders and dark pools in a bid to resolve concerns about changes in the structure of the local equity market.

The report, prepared by Baseline Capital, found that high-frequency trading, or HFT, and dark pool trading each represent about 25 per cent of the trading on Australia's capital markets.

In the United States, where HFT and off-market trades are considered a problem, HFT accounts for 50 per cent of trading, while dark pools account for 30 per cent.

Key findings of the report were:

■ HFT and dark pools have not led to significant market changes in Australia;

■ Many instances of volatility have been caused by human error rather than HFT activity;

■ A maximum of 5 per cent of HFT activity might be considered predatory - front-running on-market trades to move prices and make a profit from large orders.

Financial Services Council chief executive John Brogden said the report showed that technological change in Australia "should not be seen as an unmanageable threat".

"Australia is well positioned to introduce regulation to avoid the adverse impacts of high-frequency and dark pool trading experienced in Europe and the United States," he said.

The report found regulatory steps proposed by the Australian Securities and Investments Commission, including a levy on the extremely high volumes of trade orders or "messages" placed but not executed by HFT operators, were appropriate. The FSC cautioned against seeking to ban dark pools or high-frequency operations.

The report follows Financial Services Minister Bill Shorten releasing an options paper earlier this month which looked at reforming Australia's financial market licensing regime.

This includes considering whether high-frequency traders ought to be subject to the same market integrity rules that govern other market participants.

At the moment, some HFTs are run by "non-market participants", some based overseas. These are not required to hold an Australian financial services licence.

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