Super funds push to slow 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 sharemarket fairer and less volatile.
Under the plan, sharemarket 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" that 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 - a practice that some small investors fear puts them at a disadvantage.
"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, its 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.
Carole Comerton-Forde, from the University of Melbourne's finance department, said ISN's proposal would be a major change to how the market operated 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."
Frequently Asked Questions about this Article…
The Industry Super Network has proposed overhauling sharemarket rules so trades are matched in frequent 'call auctions' every few seconds rather than in milliseconds or microseconds. The idea is to reduce ultra-fast electronic trading and make trading fairer and less volatile.
Call auctions pool buy and sell orders and match them at set intervals—similar to automated eBay-style auctions—rather than executing individual orders instantly. This reduces the advantage of traders who use high-frequency algorithms to trade in microseconds.
The proposal came from the Industry Super Network (ISN) and was put forward in a submission to Treasury. ISN's director of regulatory policy, Zak May, outlined the plan in the article.
Slowing trading speed aims to curb short-term volatility and remove unfair advantages for high-frequency traders, so everyday investors could trade in a system that better reflects all available information and feels fairer when setting prices.
The article notes differing views: critics of limiting speed worry liquidity could be affected, while proponents of high-frequency trading argue it adds liquidity. ISN and some academics say call auctions can still provide effective price discovery while reducing speed-based advantages.
Yes. The Australian Securities Exchange (ASX) currently uses call auctions at the market opening and closing to match buyers and sellers, and the ISN proposal would extend a similar approach throughout the trading day at frequent intervals.
Regulators are actively looking at 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 to increase regulation of the practice.
Possibly. Professor Carole Comerton-Forde from the University of Melbourne notes investors today prefer the ability to trade when they want, so a key question is how frequently call auctions would run—more frequent auctions aim to balance fairness and investors' desire for timely trades.
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