Council calls for controls on high-frequency operators
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.
Frequently Asked Questions about this Article…
High-frequency trading (HFT) is computerised, high-speed securities trading that executes large numbers of orders in fractions of a second. Everyday investors should care because HFT is a growing part of market activity and can affect market structure and order flow. The report in the article examined how HFT interacts with "buy-side" operators like superannuation and managed investment funds in Australian capital markets.
According to the report commissioned by the Financial Services Council and prepared by Baseline Capital, HFT and dark pool trading are not currently a threat to the integrity of Australian sharemarkets. However, the report says they should be kept under control through appropriate new regulations to avoid potential adverse impacts.
Dark pools are share transactions conducted away from the main exchanges and not visible to the broader market. The report found that dark pool trading represents about 25% of trading on Australia's capital markets, making it a significant portion of activity that investors and regulators are monitoring.
The report found that in Australia both HFT and dark pool trading each represent about 25% of trading. By contrast, the article notes that in the United States HFT accounts for about 50% of trading and dark pools about 30% — figuresoften cited to show larger market share overseas.
The report concluded that HFT has not led to significant market changes in Australia and that many instances of volatility have been caused by human error rather than HFT activity. It did note, though, that up to a maximum of about 5% of HFT activity might be considered predatory (for example front‑running large orders).
ASIC has announced new market integrity rules for high‑speed traders and dark pools. The report supported regulatory steps such as a levy on very high volumes of trade orders or "messages" placed but not executed by HFT operators. The Financial Services Minister also released an options paper considering whether high‑frequency traders should be subject to the same market integrity rules as other participants.
No — the article points out that some HFTs are run by "non‑market participants," and some are based overseas. Those operators may not be required to hold an Australian financial services licence, which creates a potential regulatory gap that reforms aim to address.
The report was commissioned by the Financial Services Council (FSC) of Australia and prepared by Baseline Capital. The key takeaway for everyday investors is that HFT and dark pools are significant parts of Australia’s market but are not currently judged to be an unmanageable threat — however, regulators and industry bodies support targeted rules to keep HFT and dark‑pool activity under control.
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