Super-fast warning on cost of high-speed traders
The Industry Super Network, which represents the nation's industry super funds, will release a report showing high-speed traders do so by sheer force of speed.
The report - the first of its kind in Australia - shows high-speed trading takes place so quickly that orders get ahead of "natural" buyers and sellers in the queue. Traditional investors are then forced to settle for inferior prices, it says.
High-frequency trading has been the biggest thing to hit sharemarkets in recent years and, in the minds of big super funds, the most disruptive. Critics say this ultra-fast trading, about 25 per cent of turnover, has contributed to some flash crashes and computer hiccups.
But the Australian Securities and Investments Commission released a report in March that found HFT activity was largely benign, and that fears of the technology were overblown.
ASIC also said last week that it would not ask brokers to hold the orders of high-speed traders for a minimum resting time in order to slow trading down.
ISN's director of policy, Zachary May, says the structure of the equity market must be reformed to improve market integrity and fairness.
He has renewed his call for "electronic call auctions" - where trades receive the same price and happen at the same time - to be considered as a means to level the playing field.
"Doing so would go a long way towards bringing the focus of markets back to exchanging shares and allocating capital, while also supplying resilient liquidity," Mr May said.
ISN's report concludes that high-speed traders "are undermining not only the public policy objectives underlying market regulation, but the public policy objectives of the superannuation system".
But ASIC's Greg Yanco disagrees with the report's conclusions.
ASIC established a high-frequency trading taskforce to investigate the industry last year, and found little to confirm ISN's conclusions.
"The data we have is good quality, which goes right down to the trader level," Mr Yanko said. "We respect legitimate concerns of people and that's why we established the taskforce." Some trader behaviour changed in response to the taskforce, including on the number of small orders issued, he said.
The chief executive of the Australian Securities Exchange, Elmer Funke Kupper, also said he did not support the idea of forcing trades to rest for a minimum period.
He was concerned about the number of small-sized trades on the ASX, rather than the speed with which those trades were made.
Forcing brokers to hold trades for a minimum resting time would be too costly to implement and would not fix the problem, he said.
The Industry super network's cost estimate is for the opportunity cost created by high-frequency trading jumping ahead of natural buyers and sellers who may need to accept inferior prices.
Because of the absence of publicly available detailed audit trail market data, this estimate is based on conservative aggregate market data on high-speed trading activity, and relies on trading behaviour assumptions. ISN is an umbrella organisation for the local industry super movement.
Frequently Asked Questions about this Article…
High-speed traders (also called high-frequency trading or HFT) use ultra-fast technology to jump ahead of "natural" buyers and sellers in the order queue. According to an Industry Super Network (ISN) report, that speed can force traditional investors and super funds to accept inferior prices, creating opportunity costs and potentially undermining market fairness.
The ISN estimates high-speed trading is costing long-term investors and super funds as much as $1.9 billion a year in lost trading opportunities. That figure is an estimate of opportunity cost based on aggregate market data and assumptions because detailed public audit-trail data is not available.
ISN's report — the first of its kind in Australia — concluded that high-speed traders are undermining market integrity and the public policy objectives of the superannuation system. The report calls for structural reforms to improve fairness, including considering electronic call auctions to level the playing field.
ASIC has taken a different view. A March report by the regulator found HFT activity was largely benign and that fears about the technology were overblown. ASIC also set up a high-frequency trading taskforce and said it would not require brokers to impose minimum resting times for orders to slow trading down.
No. ASIC said it would not ask brokers to hold high-speed traders' orders for a minimum resting time. The Australian Securities Exchange (ASX) chief executive, Elmer Funke Kupper, also said he did not support forcing trades to rest, citing cost and concerns that such a rule would not fix issues like the high number of small-sized trades.
Electronic call auctions are trading mechanisms where trades are matched at the same time and receive the same price. ISN says using call auctions could level the playing field, focus markets on exchanging shares and allocating capital, and help supply more resilient liquidity for investors.
Critics of HFT say the ultra-fast trading, which makes up roughly 25% of turnover, has contributed to some flash crashes and computer hiccups. However, ASIC's analysis found HFT activity to be largely benign and cautioned that fears may be overblown.
ISN describes its $1.9 billion estimate as conservative and says it relies on aggregate market data and trading-behaviour assumptions because detailed, publicly available audit-trail market data is absent. That lack of granular public data means the estimate is indicative rather than definitive.
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