Concern over impact of high-frequency trading wanes, ASIC finds

Concern over the impact of high-frequency trading (HFT) operations on the Australian equities market has declined, according to new research released by the Australian Securities and Investments Commission.

ASIC today issued a new report assessing the impact of HFT on the Australian market; it last examined the practice in depth in a 2013 report.

HFT is a form of super-fast, software-driven trading designed to take advantage of small movements in share prices.

The practice is underpinned by sophisticated algorithms and optimised hardware, allowing trades to be executed in microseconds.

The 2010 'flash crash' of the Dow Jones Industrial Average was blamed on HFT.

Since ASIC's previous report on the practice, the corporate watchdog has implemented a number of new market controls to help address concerns over automated trading.

Negative sentiment towards HFT in Australia's equity markets "appears to have tapered off since 2012," ASIC's new report states.

"The regulatory settings, at least for equities, are generally considered to be appropriate."

ASIC previously contemplated mandating a 500 millisecond pause for trades to clamp down on HFT. However, given a substantial and sustained decline in "small and fleeting" orders since ASIC first made the proposal in 2013, it is not considered necessary, the report states.

Consistent with the 2012 review of HFT, high-frequency traders remain a small fraction of total market users, according to ASIC. Less than 0.5 per cent of market participants employ HFT.

The proportion of high-frequency trades remains in line with ASIC's previous findings; over the March quarter 2015 HFT accounted for 31 per cent of transactions and 27 per cent of all turnover, compared to 31 per cent and 28 per cent during the corresponding period in 2012.

The cost of high-frequency trading practices to other market participants was in the region of $110-$180 million over the 12 months to 31 March 2015, ASIC found.

There is a now a greater concentration of high-frequency traders in the domestic equity markets. The number of high-frequency traders declined by 30 per cent in the three years to March 2015, according to ASIC.

Some concerns over the practice remain, according to ASIC.

"They include 'noise', the inability to access small and fleeting orders, the exacerbation of price volatility, and the costs imposed on other market users from high-frequency trader intermediation and predatory trading," the report states.

In the Australian futures market, HFT has grown rapidly, ASIC found; however, the growth has been off a relatively low base and current levels are not concerning, the organisation concluded.

The ASIC report also examined dark liquidity.

"ASIC has concluded that current levels of high-frequency trading and dark liquidity are not adversely affecting the function of Australian markets for businesses and investors," ASIC commissioner Cathie Armour said in a statement.

"Financial markets play a critical role in the Australian economy. It is vital that they are fair, orderly, transparent and efficient and that investors can have trust and confidence in their operation."