Gonski warns of risk but says high-speed trading here to stay
But Fund chairman David Gonski, who has been in the job for 11 months, says investors should accept that they are now part of the financial landscape.
"The existence of new technology I find very exciting and far from fearing it I think overall it adds enormously to our lives and to our businesses," Mr Gonski said on Monday night.
"However, there are areas of this that make risk more difficult to judge than perhaps previously. The concept of large amounts of trading affected through algorithms and high frequency trading come to mind," he said.
"[But] this is a question very much of seeking to understand the effect of these so as to render them at worst neutral and at best to seek to optimise the position of one's institution."
Mr Gonski made the comments during a keynote address to the Australian Securities and Investments Commission's annual forum dinner last night.
It is the first time Mr Gonski has commented on high speed trading in his capacity as Future Fund chairman.
His comments come after the release last week of the ASIC's much-anticipated report on the impact that high-speed traders and "dark pools" have had on local financial markets.
The ASIC report, the result of a nine-month investigation into HFTs and dark pools, found fears about high speed traders had been largely "overstated" despite evidence that some HFTs had used questionable trading strategies.
On Monday, ASIC chairman Greg Medcraft reiterated the agency's view that HFTs were largely benign. "We found public concerns appear to have been overstated with no evidence of systematic manipulation by high frequency traders," Mr Medcraft told the ASIC forum.
"In fact, their trading strategies are commonly adopted by the buy-side. However, we will continue to monitor these issues and consider what is a "safe level" of high frequency trading."
Mr Gonksi, who retired as chairman of the Australian Securities Exchange last March, said investors needed to come to grips with the existence of "dark pools."
"The more that is not done through a substantial clearing house or in an open manner, the more I believe institutions and other investors have to understand what could go wrong in the process of their transaction," he said.
ASIC has suggested sweeping changes to the largely-unregulated corner of the market where trading takes place away from the public exchange.
These areas are referred to as "dark pools" or "dark exchanges". The regulator says the market has very little information about the "existence, nature and operation" of these trading venues.
Australia's Future Fund, which is worth $77 billion, last month excluded primary tobacco users from its investment portfolio.
The board noted tobacco's damaging health effects and addictive properties and that there was no safe level of consumption, Mr Gonski said at the time.
Frequently Asked Questions about this Article…
David Gonski said HFTs and computer-based algorithms have made it harder to judge risk, but investors should accept they are now part of the financial landscape. He described the technology as exciting and useful while urging investors and institutions to understand and manage its effects so they can be neutralised or optimised.
The ASIC nine-month report found public fears about HFT had been largely overstated and found no evidence of systematic manipulation, with ASIC chairman Greg Medcraft describing many HFT strategies as largely benign—though the regulator said it will continue to monitor activity.
Dark pools (or dark exchanges) are trading venues that operate away from the public exchange and provide very little information about their existence, nature and operation. The article notes regulators and Future Fund officials say investors and institutions need to understand dark pools because trading outside open markets or clearing houses can create risks in transaction processes.
ASIC completed a nine-month investigation and released a report finding fears about HFT largely overstated, but it suggested sweeping changes for the under‑regulated dark pool area and said it will continue to monitor HFTs and consider what constitutes a 'safe level' of high frequency trading.
Gonski advised investors and institutions to seek to understand the effects of algorithms and HFT so they can render those effects at worst neutral and at best optimise their institution’s position—basically, learn the technology’s impact and manage exposures accordingly.
Yes. While the ASIC report concluded public concerns were largely overstated and found no systematic manipulation, it did note evidence that some high frequency traders had used questionable trading strategies.
The Future Fund, which the article notes is worth $77 billion, recently excluded primary tobacco users from its investment portfolio because of tobacco’s damaging health effects and addictive properties.
The article suggests caution: officials recommend investors understand what could go wrong when trades occur outside substantial clearing houses or in non‑public venues. ASIC has proposed changes to improve transparency in dark pools, and market participants are being urged to be aware of the risks.
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