Australian fund managers have not tackled the potential impact of liquidity fragmentation brought about by the increasing popularity of dark-pool and high-frequency trading, say a professor at the Australian National University and the ASX’s general manager of equity markets.

Australia may experience the same growth in dark-pool trading as the U.S. where such trading is now more than 12 per cent of all share trading, says Carole Comerton-Forde, an ANU finance professor.  In January 2006 dark-pool trading was less than 4 per cent of U.S. stock trading, she says.

High-frequency trading now accounts for as much as 60 per cent of U.S. daily turnover, says Comerton-Forde.

“There is a fragmentation of liquidity,” she says.

Dark-pool trading is where investors, traditionally with large blocks of stock to buy or sell, execute transactions with investors of similar appetite off exchange to minimise information leakage that may adversely impact the price at which the stock is bought or sold.

High-frequency traders buy shares but hold them for only a few seconds before selling them. Typically their orders are small and they do not hold positions overnight.

“There is an ephemeral aspect of liquidity today,” says Richard Murphy, general manager, equity markets at the ASX. “Our real fear is that no one is on the bus if the bus stops.”

The average size of trades on the ASX is between $8000 and $9000. More than half of trades are less than $1500.

“Trading volume is not a good indicator of liquidity,” says Murphy.


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