Both The Australian and the Sydney Morning Herald have today reported that some of Australia’s biggest superannuation funds and advisory bodies have written to the Australian Securities and Investments Commission (ASIC) regarding the growth of high frequency trading (HFT) in the Australian equity market. Signatories to the letter to Greg Yanco, the man responsible for directing ASIC’s market supervision efforts, include US fund T Rowe Price, Australian fund Perpetual, Industry Super Network, the Australian Council of Trade Unions and the Australian Council of Superannuation Investors.

Their letter to Yanco raises two key issues pertaining to market fairness and access; first, the impact of HFT on the Australian market, and second, what these bodies view as unfairness embedded in the way in which the Australian equities market is structured. However, as I argue below, their letter is unlikely to result in ASIC taking action, at least in the immediate future.

The impact of HFT

As discussed in an earlier piece, both the measures already introduced by ASIC and those currently under consideration to deal with algorithmic trading and HFT are aimed at protecting market stability and integrity. However, the comments made by these superannuation funds appear concerned less with market stability and integrity, and more with what they argue is HFT’s impact on market fairness. In particular, the letter suggests that ASIC must address issues such as excessive order cancellation, which is caused by HFTs rapidly entering and cancelling trades, sometimes within milliseconds. A number of suggestions have been floated as to how best to address these issues, including increasing the fees on order messages. HFT firms average 70 messages per trade organised (as opposed to the 15 averaged by fund managers and 4 by the average retail investor). As a result, it has been suggested that ASX should consider increasing the fees on messages, thus increasing the cost to HFT firms of participating in the market. Other proposed solutions include imposing a one-second limit on the time between placing an order and cancelling them, thus reducing the number of rapid order cancellations.

However, it seems unlikely that ASIC will act to address the effect of HFT on market fairness anytime soon, despite these sorts of letters. As argued previously, ASIC has deliberately prioritised addressing the effects of algorithmic trading and HFT on market integrity and stability over market fairness. Such a prioritisation reflects not only global indecision as to how best to deal with HFT (as seen in IOSCO’s Report on Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency) but also continued uncertainty as whether HFT does actually provide increased liquidity to a market.

Unfair market structure

On the second point, the superannuation funds’ letter appears to accuse ASX of providing preferential access to HFTs through “co-location facilities” and “special data feeds”. These comments are presumably in reference to the Australian Liquidity Centre opened by ASX in February 2012, through which ASX provides market participants with the opportunity to base their trading technology in close proximity to ASX’s primary matching engines. This close proximity means that the participants who choose to use the Liquidity Centre minimise the latency in their data feed, providing them with a slight advantage over participants who do not use the Liquidity Centre. The superannuation funds’ comments are presumably meant to elicit comparisons to the recent charges laid by the US Securities and Exchange Commission (SEC) on the New York Stock Exchange (NYSE) after it was found to have unlawfully sent data to its proprietary feeds before its public feeds.

However, such conduct is not unlawful in Australia, and is not inconsistent with ASX’s obligation to operate a fair, orderly and transparent market under s 792(a) of the Corporations Act. That obligation, for example, permits ASX to provide market data to the public (for free) twenty minutes after it distributes that information to its proprietary data feeds. However, access to such data feeds is available not only directly from ASX, but also through third party information suppliers – albeit at a cost. As Professor Carole Comerton-Forde of the Australian National University said to the Sydney Morning Herald, access to the ASX’s co-location facilities is fair and non-discriminatory in the sense that “anyone who wants to buy access can do so.” As a result, the superannuation funds’ complaint on this point can be viewed as less a complaint about ASX providing “special access” to HFTs, and more a complaint about the fact that the superannuation funds object to purchasing space in the Liquidity Centre in order to compete with the funds.