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March 18, 2013 10:15 am
There is no evidence that high-frequency share traders systematically abuse or manipulate equity markets, according to regulators in Australia.
The Australian Securities & Investment Commission also said public concerns about the controversial trading practices had been “overstated” and could be attributed to the increasing use of new technology by investors. However, the regulator also recommended resting times for smaller deals.
The findings, contained in eagerly awaited reports and consultation papers on the impact of HFT and off-exchange trading in Australia published on Monday, will be closely studied by regulators around the world. They could help ease fears about the impact of high-frequency traders, who use computer algorithms to generate trades in tiny fractions of seconds.
Critics say HFT destabilises financial markets and puts retail investors at a disadvantage. But its supporters argue that HFT has increased liquidity in securities and helped reduce volatility. The ASIC findings chime with results from studies from Sweden and a UK government-sponsored report in the last year.
ASIC said some of the “commonly held negative perceptions” about HFT were not supported by its six-month analysis of Australian markets.
It found only 1.2 per cent of HFT traders held positions for less than two minutes and that the average holding time was 42 minutes. It said order-to-trade ratios were modest and 20 entities accounted for 80 per cent of all HFT, which in turn was just over a fifth of total equity market turnover.
“While the task force did not find systematic manipulation or abuse of markets by high-frequency traders, it found that their trading strategies are commonly adopted by many other algorithmic traders, including the institutions,” it said.
However, ASIC said it was recommending a minimum resting time of 500 milliseconds for orders of A$500 or less, noting that it had uncovered some possible breaches of market rules that had been referred to its enforcement teams for investigation.
“Many issues can be dealt with by existing regulations and there has been a marked change in the professional traders’ behaviour during the course of the study,” said ASIC deputy chairman Belinda Gibson.
European legislators have also suggested a 500ms resting time for share trading to slow down high-speed trading, although it is not limited to smaller trade sizes.
But a separate investigation into dark pools had hit share prices, leading to a widening of bid-offer spreads on “lit exchanges”. There are over 20 “dark pools” in Australia, which trade over 200 securities where prices are only displayed after a trade has been executed, and these account for around 7 per cent of total equity market volume, according to ASIC.
“Dark trading is now occurring in smaller sizes that are similar to ‘lit’ exchange markets and for some securities this has influenced their price,” the report said.
ASIC said there was a need for greater disclosure on dark pools operated by big investment banks and in particular the behaviour of their proprietary trading desks.
“There have been some instances where other parts of a market participant’s business may be gaining an insight into the order in a crossing system and therefore an advantage over other users.”
It said it would forward a package of new market integrity covering transparency, monitoring, conflicts of interest and fairness in dark pools.
“Electronic trading has been with us since the 1970s. It is now exponentially faster and regulation must move with it,” said Ms Gibson.
The new rules were largely welcomed by the Australian Securities Exchange, which has been pushing for the tougher regulation of alternative trading venues such as dark pools and in the introduction of minimum order sizes.
However, it expressed caution at ASIC’s decision to seek industry feedback on lowering tick sizes, or the increments by which share prices are allowed to fluctuate, for some securities. ASIC says tick sizes should not be an incentive for dark trading.
“When it comes to tick sizes we understand that there is judgment involved between promoting lit markets and making sure that HFT doesn’t become a serious issue in Australia,” it said.
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