New reviews into the impact of high-frequency trading (HFT) and dark liquidity on Australian equity markets finds concerns about them have eased, the Australian Securities and Investments Commission (ASIC) announced on Monday.
The Australian regulator’s analysis of HFT finds that market users have become better informed and equipped to operate in an electronic and high-speed environment, the ASIC report, and negative sentiment about HFT has declined.
The level of HFT in Australia’s equity markets has remained steady (at 27% of total turnover), the ASIC reports. Meanwhile, HFT has grown by 130% in the futures market since December 2013. “These levels are not currently concerning, however, ASIC will continue to monitor their development,” the Australian regulator said in a statement.
High-frequency traders “have become more sophisticated, generating higher gross revenue and trading more aggressively than in 2012. They are also more active in mid-tier securities,” the ASIC added.
“Predatory trading by high frequency traders does not appear to be excessive in our market, but we do investigate instances where there may be a breach of the law. Some institutional investors have become more sophisticated, increasingly managing their own order flow and execution decisions so they can limit interaction with predatory traders and improve their trading outcomes,” the ASIC said.
As for trading in the dark, the regulator reports that the share of trading activity accounted for by dark liquidity has remained reasonably constant in recent years, at around 25–30% of total equity market turnover. However, the market’s composition continues to change, the ASIC noted. “Since ASIC’s 2012 review, there has been a shift back to using dark liquidity for its original purpose — that is, for large block trades,” it said.
In addition, there is now less concern with dark liquidity, the regulator noted, as worries about the transparency and fairness of market participant-operated crossing systems have mostly abated.
Still, concerns remain about exchange market and crossing system operators seeking to preference some users over others, the ASIC said. The Australian regulatory is also concerned about the methods used by some market participants to manage their conflicts of interest for principal trading and client facilitation.
“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,” said Cathie Armour, ASIC commissioner, 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.”
This latest evidence pushing back against critics of HFT follows recent research in Canada that also appears to refute common concerns about these sorts of traders.
Notably, research presented at a public policy forum hosted by the Investment Industry Regulatory Organization of Canada (IIROC) and the Capital Markets Institute (CMI) at the University of Toronto recently, indicated that HFTs contribute more information to the price discovery process than other sorts of traders, and boost market liquidity. In addition, there’s little evidence that HFTs systematically take advantage of slower traders, or that they front run their orders.
Similarly, the B.C. Securities Commission (BCSC) also recently released research which found no statistical support for concerns that, in the Canadian venture market, HFTs exacerbate volatility, and limit stock price gains following the release of positive news.