Plan to slow high-speed trades
As governments around the world consider policies to rein in high-speed computerised trading, the group representing industry super funds has put forward a radical proposal that it says would make the market fairer and less volatile.
Under the plan, market rules would be overhauled so that trades effectively took place every few seconds, rather than every millisecond or microsecond, as occurs today.
The Industry Super Network, which has proposed the change in a submission to Treasury, argues such a move would curb volatility in the sharemarket and remove the unfair advantage given to investors using high-frequency trading platforms.
ISN's director of regulatory policy, Zak May, said the proposal was to pool investors' orders into a series of "call auctions" which would occur frequently throughout the day.
Call auctions - which match buyers and sellers in a similar way to automated eBay auctions - are already used by the Australian Securities Exchange at the opening and closing of the market.
The plan would mean that investors could no longer profit by buying and selling shares in a matter of microseconds.
"The proposed call auction structure would ensure that investors could have confidence that they are transacting in a fair system and at a fair price that reflected all the available information at the time," Mr May said. "In a call auction, the importance of excessive speed, and the advantages of high frequency traders, is reduced."
The proposal comes as regulators and businesses around the world grapple with how best to regulate high-speed trading so that market stability and integrity are not compromised. While some investors complain the practice has compromised the stability and fairness of sharemarkets, proponents say it adds liquidity.
The Australian Securities and Investments Commission has formed a taskforce investigating high-speed trading, while in Germany the government is moving to place greater regulation on the practice.
Professor Carole Comerton-Forde, from the University of Melbourne's finance department, said ISN's proposal would be a major change to how the market operates but it should not be automatically dismissed.
"Call auctions are a very effective way to discover prices in the market," Professor Comerton-Forde said. "But investors these days appear to have a preference for the ability to trade when they want, so the question is how frequently you should have the call auctions operating."
Any change towards call auctions should be market-driven, rather than a result of regulation, she said.
The Australian Securities Exchange has examined intra-day auctions and committed to a trial in stocks outside the top 300, but with the goal of lifting liquidity rather than curbing high-speed trading.
Frequently Asked Questions about this Article…
The Industry Super Network (ISN) has proposed overhauling market rules so trades are effectively processed every few seconds instead of every millisecond or microsecond. The idea is to pool investor orders into a series of frequent 'call auctions' throughout the day to curb volatility and reduce the speed advantage of high-frequency trading.
Call auctions group and match buyers and sellers at set moments—similar to automated eBay-style auctions—so prices reflect all pooled orders at that time. For everyday investors this could mean fairer pricing and less advantage for traders relying on ultra-fast execution, though it also changes how and when trades are executed.
According to the ISN proposal, frequent call auctions would reduce the importance of excessive speed and make it much harder to profit from buying and selling in microseconds. It wouldn't necessarily ban high-frequency trading entirely, but it would remove some of the time-based advantages.
The impact on liquidity is debated. Proponents of high-frequency trading say it adds liquidity, while ISN and other critics argue slowing ultra-fast trades would curb harmful volatility. The Australian Securities Exchange has explored intra-day auctions specifically to lift liquidity in less-traded stocks, showing the effect can depend on how auctions are implemented.
Regulators are actively examining the issue: the Australian Securities and Investments Commission (ASIC) has formed a taskforce to investigate high-speed trading, and other jurisdictions such as Germany are moving toward greater regulation. The ISN has also submitted its proposal to Treasury for consideration.
Frequent call auctions would reduce continuous, instantaneous execution, so investors may need to place orders for the next auction window rather than receive immediate fills. As noted by market academics, many investors prefer the ability to trade on demand, so the key question is how often auctions would run to balance convenience and fairness.
Yes. The ASX has examined intra-day auctions and committed to a trial for stocks outside the top 300. That trial is intended primarily to lift liquidity in those stocks rather than specifically to curb high-frequency trading.
Benefits cited in the article include reduced market volatility, fairer prices that reflect pooled information, and less advantage for ultra-fast traders. Drawbacks include reduced immediacy of trade execution and uncertainty about effects on liquidity—opinions differ and some experts say changes should be market-driven rather than imposed solely by regulation.
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