Securities regulators in Australia suggest that concerns about the impact of high frequency trading (HFT) are overblown.
The Australian Securities and Investments Commission (ASIC) released a new report and a consultation paper examining the impact of dark liquidity and high-frequency trading on Australia’s financial markets. The reports are based on the work of two internal ASIC taskforces, which were set up to address concerns about the impact of the dark pools on market efficiency and quality, and concerns about disorderliness and unfairness due to the rise of HFT.
The paper concludes that, at least in Australia, concerns over HFT “appear to have been overstated”. It also found that these concerns may be attributed to the increasing use of technology by investors generally, not just so-called HFTs. The taskforce reports that it did not find systematic manipulation or abuse of markets by HFTs. It did see some evidence of predatory trading behaviour, but notes this wasn’t restricted to HFTs.
The report says that it found that order-to-trade ratios in Australia are moderate compared to overseas markets; and that the average holding time is 42 minutes, not seconds. The ASIC does note that HFT strategies can create ‘noise’ in the markets, and so it is making a number of recommendations designed to moderate this activity.
It is also making some recommendations to deal with issues it found with trading in dark pools, including rules that aim to protect against dark liquidity negatively impacting prices, improved disclosure and supervision of dark trading, and restrictions on small fleeting orders.
The taskforce examining that issue found that while the share of trading that’s taking place in the dark has remained at around 25%-30%, the composition of dark liquidity and dark venues (crossing systems) has changed significantly, and dark trading is now occurring in smaller sizes, which is influencing prices in some securities (widening spreads and reducing the quality of price discovery).
The ASIC notes that it uncovered some practices that require further controls, and regulatory gaps that need to be filled. ASIC deputy chairman, Belinda Gibson, said, “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 ASIC study.”
Nevertheless, it is recommending a variety of reforms. “Companies should have confidence that share prices reflect their true value, and that they are able to efficiently raise capital. Similarly, investors should have confidence that they will be able to buy and sell shares at a fair and efficient price on an orderly market,’ Gibson said.
Both taskforces also found potential breaches of its market integrity rules during their research, and it notes that some of the instances are being investigated.