Learn to live with high-tech trading, says Gonski
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," he said on Monday.
"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.
"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 speech to the Australian Securities and Investments Commission's annual forum dinner. It is the first time he has commented on high-speed trading in his capacity as Future Fund chairman.
His comments come after the release last week of ASIC's report on the impact high-speed traders and "dark pools" 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 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," he 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 Gonski, 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, reflecting a lack of transparency.
The regulator says the market has little information about the existence, nature and operation of these trading venues.
Frequently Asked Questions about this Article…
High-frequency trading (HFT) uses computer algorithms and high-speed execution to place large quantities of trades in fractions of a second. According to the article, HFT can make it harder to judge market risk because automated trading can change price dynamics quickly; however, ASIC's report found public fears were largely overstated and saw no evidence of systematic manipulation.
David Gonski is the chair of Australia’s multibillion-dollar Future Fund (in the role for 11 months at the time of the article) and a former ASX chairman. In a keynote to the ASIC forum he said new trading technology is exciting but makes risk harder to judge, and he urged investors and institutions to understand these effects so they can neutralise risks or optimise their positions.
ASIC’s nine-month investigation concluded that concerns about high-speed traders had been largely overstated, with no evidence of systematic manipulation, though some HFTs used questionable strategies. The report also highlighted limited public information about dark pools and prompted suggestions for regulatory change.
Dark pools are trading venues where transactions can occur away from public exchanges and often with limited transparency. The article notes regulators and Future Fund chair David Gonski warned investors need to understand what could go wrong when trades don’t go through substantial clearing houses or open venues, and ASIC has suggested sweeping changes to this largely unregulated area.
ASIC chairman Greg Medcraft reiterated that high-frequency trading is largely benign and that many HFT strategies are also used by the buy-side, but the regulator will continue to monitor activity, investigate questionable strategies and consider what a 'safe level' of HFT might be.
The article quotes Gonski saying institutions need to study the effects of algorithmic and high-frequency trading so they can render those effects neutral or even optimise their own positions. That means institutional investors should assess execution venues, clearing arrangements and how automated flows affect price and liquidity.
The article suggests investors should accept that HFT and dark pools are now part of the market landscape and seek to understand their impact. While ASIC found broad fears were overstated, everyday investors benefit from being aware of execution and transparency issues and from monitoring regulatory developments.
ASIC has suggested sweeping changes to the largely unregulated corner of the market where trading occurs away from public exchanges. The regulator flagged that the market has little information about the existence, nature and operation of dark pools and indicated it will continue monitoring and considering reforms.
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