A multitude of high level officials from around the world, inspired by the book ‘Flash Boys’ by Michael Lewis, have been promising over the past couple of years to stop HFT tactics supposedly giving hedge funds unfair advantages. Politicians have also promised to take action against the practice, with Hillary Clinton suggesting a tax on spoofing and dark liquidity being the latest example.
Today, the Australian Securities and Investments Commission (ASIC) announced the results of its own study, which examined the impact of high-frequency trading on Australian equity and futures markets and dark liquidity on Australian equity markets.
The level of high-frequency trading in Australia’s equity markets has remained steady (at 27% of total turnover). High-frequency trading has grown by 130% in the futures market since December 2013 to 21% of volume traded in the SPI and 14% of bond futures. These levels are currently not concerning says ASIC, however, it will continue to monitor their development.
The watchdog’s analysis shows that market users have become better informed and equipped to operate in an electronic and high-speed environment, and negative sentiment about high-frequency trading has reduced. High-frequency traders have become more sophisticated, generating higher gross revenue and trading more aggressively. Predatory trading by high-frequency traders does not appear to be excessive in the Austrian market.
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ASIC Commissioner Cathie Armour said: “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. 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.”
Concerns Remain over Dark Liquidity
The watchdog’s analysis also shows that dark liquidity has remained reasonably constant in recent years at around 25% to 30% of total equity market turnover. However, its composition continues to change. Since ASIC’s last review in 2012, there has been a shift back to using dark liquidity for its original purpose –large block trades.
Responses received by ASIC from various stakeholders also indicated that there was now less concern with dark liquidity in Australian markets. Concerns previously held about the transparency and fairness of market participant-operated crossing systems have mostly abated.
However, ASIC says it remains concerned about exchange market and crossing system operators seeking to preference some users over others. It is concerned about the methods used by some market participants in managing their conflicts of interest for principal trading and client facilitation.