In the major markets around the globe the sleepy securities industry regulators are starting to wake up to the fact that their markets have been captured by investment banks who are effectively legalised insider traders – the so-called "high frequency” traders.
These traders have been allowed to have a pipe into the major markets to give them an advantage over legitimate stock buyers and sellers. Business Spectator has led the world in highlighting the insider advantages these traders have secured (Getting the jump on high-frequency trading, July 18).
The New York Times reports last night that global regulators are trying to stamp out the practice with new regulations. And of course because the large genuine institutions do not like being ripped off by the high frequency traders, and their pipes into the market, legitimate people have left the large exchanges. They have started what are called dark pools, where effectively legitimate institutions trade among themselves. It’s not ideal but better than the stock exchange system.
My view is that the high frequency traders are making so much money and the regulators are so sleepy that the new regulations will fail.
I hope I am wrong. There is only one way around the problem created by the pipes that the legalised insider traders have into the market – the pipes must be severed and the markets restored to fair places to do business.
The CEO of the ASX Elmer Funke Kupper in in his KGB Interview agreed that if the regulators failed in these current efforts, then cutting the pipes were the only solution.
According to The New York Times the high frequency traders and their pipes into the market conduct 65 per cent of US stock exchange trading. In Europe the proportion is 45 per cent. In Australia 30 per cent of the trading is subjected to these crooked practices. We are better than the US but its still a woeful indictment on our sleepy regulators.
But in the US regulators are so bad that they seem corrupt. Next week the US Securities and Exchange Commission is hosting a round table on the topic but the agency has not proposed any major new rules this year. The conference is simply window dressing.
In contrast, the German government this week advanced legislation that would, among other things, force high speed trading firms to register with the government and limit their ability to rapidly place and cancel orders – one of the central strategies used by the firms to take advantage of small changes in the price of stocks.
A few hours later, a committee at the European Parliament agreed on similar but broader rules that would apply to all 27 member states of the European Union if governments also give their approval.
The New York Times reports that in Australia, the top securities regulator recently stated its intention of bringing computer-driven trading firms under stricter supervision and forcing them to conduct stress testing, to protect "against the type of disruption we have seen recently in other markets.”
However the broadest and fastest changes have come out of Canada, where this spring regulators began increasing the fees charged to firms that flood the market with orders. The research and trading firm ITG found that the change had already made trading more efficient by reducing the crush of data burdening the market’s computer systems.
It's good to see that the regulators acting but I just don’t think they are smart enough.