The Industry Super Network (ISN) has called for a moratorium on high frequency trading (HFT) in Australian markets because of the potential negative impact on long-term investors.
Zachary May, ISN director of regulatory policy, says HFT is on the rise in Australia and already accounts for the majority of trading in the United States.
The advent of alternative execution platforms in Australia, such as Chi-X, could increase the prevalence of HFT in the Australian market.
May says HFT trading “creates and exploits an unlevel playing field” which can come at the expense of long-term investors such as super funds.
“HFT undermines investor confidence in the markets because the way HFT firms obtain advantages – with sneak peaks at market information – is fundamentally unfair to long-term investors such as super funds,” May said in a telephone interview.
He listed three negatives issues with HFT.
“One is that the liquidity is poor quality and tends to dry up in times of stress and makes the market more fragile,” said May.
“The second issue is fairness. In some cases HFT traders will pay for information on a sneak-peak basis, which creates advantage through special access.
“And a third problem is deceptive practices. An estimated 90 per cent of HFT orders are cancelled before they can be executed against, suggesting that they have only been done to sniff out interest or even confuse others.”
In many cases, said May, HFT order cancellation practices are not “bona-fide commercial activity” and are not based on sound market fundamentals; rather, it was trading based on data simply to make profits.
The ISN has made a submission to the Australian Securities and Investments Commission on the subject, along with a number of other issues the network believes have the ability to impact on long-term investors.