The Australian Securities and Investments Commission today confirmed it will not move ahead with previously proposed regulatory changes to rein in high-frequency trading (HFT), after a report released earlier this year found that the impact of HFT on the Australian market was minimal.
HFT is a form of super-fast software-driven trading underpinned by sophisticated algorithms that allow trades to be executed in microseconds, profiting from small changes in share prices.
In May 2010 the so-called 'Flash Crash', when the Dow Jones Industrial dropped by almost 1000 points in half an hour, was blamed on automated HFT-style trading. 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.
HFT has driven a technological arms race among hardware vendors, which seek to provide platforms that can shave slivers of a second off orders. For example, networking vendors Arista, Cisco and Juniper offer switches designed to make placing orders as fast as possible.
An ASIC taskforce established in mid-2012 recommended implementing a pause of 500 milliseconds for small orders of $500 or less and changing the Market Integrity Rules for the ASX and Chi-X to remove a reference to 'materiality' to force traders to consider the impact an order can have on a market even in the case of small trades.
A report issued by the financial regulator in March stated that "some of the commonly held negative perceptions about high-frequency trading are not supported by our analysis of Australian markets".
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.
"We found that increases in order-to-trade ratios have been moderate compared with overseas markets, and although high-frequency traders’ order-to-trade ratios are greater than the rest of the market on average, the difference is not as great as many would expect," ASIC chairperson Greg Medcraft said in a speech to the Stockbrokers of Australia annual conference last month.
However, Medcraft acknowledged that HFT potentially undermined investor confidence and contributed to market "noise" due to the placing, amendment and cancelling of trades.