Turning the table on high-frequency traders

A key executive of one of Australia's largest retail stock brokers has blown the lid on what he calls the "market rigging” which is taking place on the Australian stock exchanges.

He was commenting on my article (Getting the jump on high-frequency trading, July 18).

Bell Potter's managing director for its wholesale division, Charlie Aitken believes that the "market riggers” – the so-called high-frequency traders – are causing the community to lose faith in Australian and world stock markets.

Aitken believes that the high-frequency traders account for at least 75 per cent of Australian market turnovers. While nominally the HFT traders are mostly household names among institutional brokers, Aitken believes these brokers are acting for shadowy anonymous overseas traders.

Aitken says that it is a national scandal that 75 per cent of ASX turnover is being conducted by unknown people whose solvency is uncertain and who could cause an Australian market meltdown if they collapsed. Aiken says these unknown people are not only manipulating the market but are the main cause if the violent share price fluctuations. In turn these fluctuations are driving retail investors out of share markets.

Aitken says that the justification that the "market riggers” provide liquidity to the market was simply incorrect. They are merely taking cream off the market – it's a form of "legalised scalping”.

Aitken believes that this "market rigging” is starving companies of capital and the huge fluctuations it creates means that rights issues can no longer be underwritten. Via Aitken an institution, which did not wish to be named, also contributed to the debate taking the Aitken allegations a step further.

The institution says: "High Frequency Trading (HFT) creates false and misleading markets by being both sides of a stock.

"HFT pull their bids and offers as soon as it becomes apparent which way the flow in moving. Not only do they pull their bids or offers but also transact more stock going the same direction as the perceived order to try and sell this stock back to the buyer a few cents higher. This exacerbates the price moves and increases market impact.

"This is an unacceptable ripping off of the Australian consumer, whose money we manage, so I will continue to move more and more of my orders away from the official market and into dark pools. (Off market transactions)

"By mid next year most institutional orders will be done off room (in dark pools) and the market will have even less price discovery power. Volatility will continue to increase over this time.

"ASX you have really lost sight of your mission and purpose in life, to provide orderly markets and not to be focussed on increasing turnover at the cost of destroying confidence in the very asset class that supports you.

"The ASX do not actually own any stocks, they merely run an auction every day to which investors and potential investors come to transact. While there is preferential treatment being given to one class of investor these other participants will stay away and the ASX will end up throwing a party to which nobody comes”, the institution says.

In Business Spectator conversation that followed my comments, those trying to defend what I had called "legalised insider trading” said that the brokers had paid for the privilege of having a pipe into the trading system and so were entitled to the benefits. In other words they paid for the ability to "rig the market” (Aitken's words) and so they should be allowed to do it.

That's probably the view of the regulators who are turning a blind eye to the to the legalised insider trading being conducted. Frankly I believe markets should be fair and no one should have a special preference even if they can afford to pay for it.

In my view this is one of the greatest scandals in Australian business but it's also a world problem. If we took a stand against the legalised insider trading or "market rigging” we would be hailed around the world.

In London I discover there is a whole queue of private equity deals wanting to list but the London market is as bad as Australia so they can't be floated. In New York the number of listed companies has slumped.

Australia needs to stand up against the legalised insider trading. In the short term it will mean turnovers and ASX profits will slump. Longer term if we rung a clean market we will attract capital from all around the world.