Stocken: HFT Concerns Are Overstated
Last month the Australian Securities and Investments Commission (ASIC) released the findings of its dark liquidity and high-frequency trading taskforces. The report, “Dark liquidity and high frequency trading,” will no doubt be well received by high-frequency traders themselves and brokers. But the ASIC findings may raise some eyebrows from within the domestic Australian Funds Management community.
Australian brokers spent a lot of their time in 2012 answering client surveys, with typical questions concerning:
• How they routed their order flow?
• Did they broker to HFT?
• Did they run their own HFT models?
• How did their dark pools work?
• When did their Prop books become involved in their dark pools?
Indeed, one local industry body, the Industry Super Network (ISN), has been very vocal in expressing its concerns about HFT. In its February 2013 Research Report, “Toward A Fairer and More Efficient Share Market,” ISN stated that the current Australian market structure facilitates “high frequency trading, and is resulting in wealth being redistributed from investors like superannuation funds to certain classes of traders.” ISN claims that a solution to this perceived problem is straightforward and suggests that the introduction of frequent call auctions during the trading day is required.
However, the ASIC investigation finds that “some of the commonly held negative perceptions about high-frequency trading are not supported by our analysis of Australian markets.” ASIC reports that HFT is not a key driver of price formation and does not exacerbate market instability. Furthermore, ASIC finds that exchange co-location services are not inherently unfair.
Key ASIC Findings on HFT in Australia
• High-frequency traders accounted for 27% of total turnover in S&P/ASX 200 securities.
• The 10 largest high-frequency traders were responsible for approximately 60% of all high-frequency trading turnover.
• The average holding period of securities traded by high- frequency traders was approximately 42 minutes.
However, ASIC was concerned that excessive messaging noise and the bombardment of small orders was damaging investor confidence. Therefore, ASIC is proposing to introduce a minimum resting time of 500 milliseconds for orders below $500.
ASIC on Dark Liquidity in Australia
ASIC mentions “safety” as one of the reasons fundamental investors cite when explaining why they execute in the dark — e.g., so that these investors can avoid the perceived predatory and unfair trading activity of HFT on lit exchange markets. There are currently 20 crossing systems registered with ASIC (up from 5 in 2009). There is a high degree of principal trading in crossing systems (it can be as high as $1 in every $3 on some systems). But overall, ASIC finds that operations are generally fair. Nevertheless, ASIC is recommending that broker crossing systems should:
• Have transparent procedures
• Make disclosures about the user’s obligations
• Monitor and report trading misconduct to ASIC
• Not unfairly discriminate between users
• Give clients an opt out clause
These new ASIC requirements fall short of what the Australian Securities Exchange (ASX) is suggesting to the Australian Treasury. In its February 2013 submission, “Australia’s Financial Market Licensing Regime: Addressing Market Evolution,” the ASX urges Treasury that there “is no policy basis to have a different licensing model and set of regulatory controls for lit and dark venues offering broadly similar execution services.” The ASX makes specific reference to its Centre Point product, which it says is subjected to a significantly “different regulatory regime to other dark order books that are operated by brokers.”
Centre Point is the ASX anonymous midpoint matching service and has been a runaway success for Australia’s incumbent exchange. In fact, ASIC references Centre Point as the “largest dark venue in the Australian market.” In recent weeks Centre Point has twice exceeded 5% of ASX traded volumes. However, some brokers bemoan the ASX Centre Point trading fee. ASX charges brokers a .15 bps trading fee for a normal trade but a .50 bps fee for a Centre Point trade.
New Block Trade Thresholds
Perhaps one of the most interesting imminent changes to the Australian equity market microstructure is the block trade thresholds that will be introduced on May 26, 2013. In Australia (unlike some other jurisdictions) brokers can report “block” trades that can be outside of the existing NBBO. For more than 20 years, the threshold has been AUD$1 million. But the new tiered thresholds will be $1 million, $500k and only $200k for the majority of listed equity securities. This is an exciting development for brokers, but it may result in a spike in off-exchange blocks, to the detriment of the lit book.
David Stocken is an experienced financial markets professional. His last role was as the Senior Manager, Institutional Sales, with the Australian Securities Exchange. Prior to that, Stocken was an equity derivatives trader with Macquarie Bank.