Algorithmic advantage of high-frequency traders has waned, ASIC finds

Advantages once enjoyed by high-frequency traders have ‘dissipated,’ ASIC says

The Australian Securities and Investments Commission (ASIC) has concluded that the growth of high-frequency trading has tapered off. ASCI’s latest review of the practice has concluded “tactical advantages” formerly enjoyed by high-frequency traders have been dissipating as algorithmic execution of trades has become an increasingly mainstream tool.

The corporate regulator this month released the results of a review examining the impact of HFT on the Australian equity market as well the AUD/USD cross rate market.

HFT relies on algorithm-driven systems designed to automatically execute quick trades in an effort to profit from short-term price movements. The 2010 Dow Jones Industrial 'Flash Crash' was blamed on HFT-style trading, leading to the US Securities and Exchange Commission rolling out new rules to address the practice.

ASIC at one stage contemplated introducing a 500 millisecond pause on trades to curb the impact of HFT, but past reviews of the practice by the regulator have concluded that fears about its impact on the Australian market have tended to be overblown. ASIC never moved ahead with the idea.

“These traders are investing in faster technologies and reacting to similar signals,” ASIC found during its latest review of the practice. “Speed of execution gives them a competitive edge, but it is not their only measure of success. High-frequency traders are broadening their trading strategies and increasingly taking on more market risk,” its report states.

The latest review concluded that although high-frequency traders “retain a large presence within the Australian equity market,” their contribution to turnover has weakened.

The level of HFT in equity markets has fallen in the three-year period from March 2015 to March 2018, ASIC found. “A steady downtrend in participation rates has high-frequency trading accounting for 25% of all turnover,” the report states.

In the AUD/USD FX market, HFT peaked at 35 per cent in early 2013, ASIC said, and now accounts for around 25 per cent of all turnover.

“High frequency activity has declined over the past three years but still retains a substantial footprint across our markets,” said ASIC commissioner Cathie Armour.

“This review reinforces the strength of the Australian market structure and the importance of having a varied mix of traders and investors in our markets.”

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