Letters of the Week

Super splitting, high frequency trading, and the China syndrome.

Super splitting savings?

As far as I can tell, if I conduct ‘super splitting’ with my wife, 85% of the actual dollar amounts of my contributions from the previous financial year are transferred across to her super account and seem to be invested into her account at whatever unit price is prevailing at the time I do the split. This means that if my super has done badly during the previous financial year (ie. the unit price has dropped), and in fact if it has done badly overall up to the point where I decide to do the split (which can be any time up to the end of the following financial year), I can avoid incurring those losses in the amounts I contributed during that financial year by 'splitting' them across to my wife's account. Of course, vice versa applies. Is that correct?

R Passey

Bruce Brammall’s answer: No, if you’ve had the money invested during that period, you will most likely incur the losses in your super fund when you go to sell the investments to transfer the money to your wife’s super account. In fact, it would act more like “gearing” your super fund and it would magnify the losses.

The spouse splitting rules doesn’t take into account the performance of investments over that period – just the contributions. You can split contributions up to 85% of concessional contributions (given that the 15% tax has been paid in your account, where the money first arrived). It doesn’t matter how investment markets have behaved.

Let me show you by way of example. Let’s say your super fund is worth $75,000 and you’ve made $25,000 worth of concessional contributions, that you now intend to transfer to your wife under the spouse splitting rules (which means you could split, to her account, $21,250). During that year, markets drop 25%, which means your investment has fallen from $96,250 (assuming the 15% contributions tax has been paid on the $25,000), to $72,187.

You can spouse split the $21,250 with her after that, which would reduce your super fund to $50,937. The 25% fall in the market, after the spouse split, has actually seen your super fund fall by 32% (from $75,000 to $50,937).

HFT order mystery

Thanks for various discussions concerning High Frequency Trading. HFT certainly does raise the blood pressure amongst many. I generally try to remain cautious with respect to decrying change. However, there is an aspect of HFT that seems to be little understood, which I would like to explain. My experience proves that there is more to the claim “The method relies on advanced mathematics and engineering skills to get slightly ahead of the market in knowing when a ‘buy’ or ‘sell’ order is coming”. I have evidence that the trading systems (which pay extra for the privilege) actually do have prior warning of a real order, and can change their orders before the incoming order is processed. This is not a matter of using mathematical processing of historical trading patterns to predict the likelihood of future trades. They actually learn of new orders coming online and are able to act before these orders are processed. As an example on March 28, 2012, I put a sell order for 17,734 AWE shares at price of $1.855 at a time when about 100,000 shares were listed for purchase at that price. Trading had been light (apart from the buzz of small quantity orders), but all the buy orders disappeared on my sell order being submitted, with zero trades recorded between the time my order was placed and the buy orders cancelled. This is just one of many occasions I have noticed the cancelling of orders as a result of my order being placed. Most trading systems have rigidly enforced transactional semantics. The HFT traders seem to be able to be able to pay extra to avoid the normal transactional requirements. The normal requirements would be to: 1. Receive new order; 2. Disable processing further orders; 3. Process new order and adjust order stack; 4. Enable processing further orders. Given that this clearly does not happen with HFT traders I consider the transaction processing of the stock exchanges to be broken, and deliberately broken to favour the HFT traders. Rather than providing "improved liquidity", HFT actually distorts the market and less "liquidity". I have seen moderately traded stocks move 5% just because I have put in a real order.

C Thompson

Slowing or accelerating?

It amazes me how the commentariat continue to tell us that the Chinese economy is slowing. Alan Kohler fell into the same trap in his Weekend Briefing, under the heading “Iron Ore”. And yet if I read other reports about the Chinese economy I am sure to be told that China's rate of growth has fallen from around 14% to 7%. Now, when I went to school, which I must admit was a long time ago, I learned that "rate of growth" could also be called “acceleration”. So if the current rate of growth for the Chinese economy is around 7%, then surely the Chinese economy is accelerating at 7% per annum. I am not sure how Mr Kohler can possibly report this as a slowing economy.

M Johnson