Plan to slow high-speed trades
THE speed at which investors can trade shares would be slowed down dramatically under a plan to put the brakes on ultra-fast electronic trading on the sharemarket.
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.