ASIC examines 'pause' to tackle HFT: Report

500 millisecond pause reportedly back on the table to curb high-frequency trading

The Australian Securities and Investment Commission (ASIC) reportedly may resurrect the idea of implementing a 500 millisecond pause on trades in an effort to put the brakes on high-frequency trading (HFT).

HFT is a form of super-fast software-driven stock market trading underpinned by sophisticated algorithms that allow trades to be executed in microseconds, allowing profits to be made from small changes in share prices.

Alongside attempts to build better software systems the practice has led to a hardware arms race between vendors that seek to provide HFT-friendly equipment than can shave a fraction of a second off orders. Arista, Cisco and Juniper offer network switches designed to make placing orders as fast as possible, for example.

In a report released in June 2013, ASIC revealed that it did not intend to move ahead with regulatory changes designed to curb HFT. An ASIC taskforce established in mid-2012 had recommended implementing a pause of 500 milliseconds for small orders of $500 or less.

An ASIC analysis found that between January and September 2012, HFT was responsible for 27 per cent of equity market turnover. Eighty per cent of this was by 20 trading entities.

However, a report issued by the financial regulator in March 2013 stated that "some of the commonly held negative perceptions about high-frequency trading are not supported by our analysis of Australian markets".

The chairperson of the financial regulator, Greg Medcraft, acknowledged in a speech the month before ASIC revealed it would not move ahead with the 'pause' proposal that HFT potentially undermined investor confidence.

HFT could contribute to market "noise" due to the placing, amendment and cancelling of trades, Medcraft said at a Stockbrokers of Australia conference.

The Australian Financial Review today reported that ASIC had told the inquiry into Australia's financial system chaired by David Murray the regulator would consider introducing a half-second clamp on trades to remove HFT's speed advantage.

"If people can’t have trust and confidence in the market, then you don’t have a market," Medcraft told the AFR.

HFT has been brought back into the spotlight by the publication last month of Flash Boys: A Wall Street Revolt by Michael Lewis.

Lewis' book claims the stock market is "rigged". "Taking advantage of loopholes in some well-meaning regulation introduced in the mid-2000s, some large amount of what Wall Street had been doing with technology was simply so someone inside the financial markets would know something that the outside world did not," he wrote in an extract published in the New York Times.

"The same system that once gave us subprime-mortgage collateralized debt obligations no investor could possibly truly understand now gave us stock-market trades involving fractions of a penny that occurred at unsafe speeds using order types that no investor could possibly truly understand," Lewis wrote.

In May 2010 the Dow Jones Industrial dropped by almost 1000 points in half an hour — the so-called 'Flash Crash', which automated HFT-style trading was in part blamed for. As a result, the US Securities and Exchange Commission rolled out rules to pause trading when there were significant swings in share prices in a short period.

ASIC has been approached for comment.

Tags high-frequency tradesASICAustralian Securities and Investments Commission

More about AristaAustralian Financial ReviewAustralian Financial ReviewAustralian Securities and Investment CommissionAustralian Securities & Investment CommissionCisco Systems AustraliaDow JonesJuniperSecurities and Exchange CommissionWall Street

1 Comment

David

1

Looks like someone at ASIC read the Clif's notes version of Flash Boys and missed the context of why IEX does what it does. While this is a valiant attempt Chi-X did not take a substantial volume of trades (when last i heard) so I'm unsure what impact this delay would have.

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