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Want to Blunt High-Frequency Trading? Australia Has a Plan


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Want to Blunt High-Frequency Trading? Australia Has a Plan

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Regulators should strive to make it unprofitable for high-frequency traders to front-run markets, said the head of Australia’s main stock exchange, outlining an Australian approach to such traders that contrasts with the more freewheeling model in the U.S.

“We want to continue to tighten the economics of the practice,” said Elmer Funke Kupper, chief executive of ASX in an interview with Dow Jones Newswires and The Wall Street Journal.

Growth in high-frequency trading is a newer development in Australia than in the U.S. and Europe. The country opened up its stock market to exchange competition less than a year ago as part of a plan to lower trading costs and improve liquidity.

In the months since then, new competitor Chi-X has drawn some trading away from ASX, while trading in off-exchange venues such as dark pools has grown significantly. High-frequency traders have begun trading more in the country as a saturation of their strategies has begun to damp their profits in the U.S.

But as they watched the U.S. technological arms race in high-speed trading produce market fragmentation and trigger some unnerving technological glitches — most recently in the snafu that cost brokerage Knight Capital KCG -2.20% $440 million — Australia’s regulators have adopted a wary posture.

“Our regulators are taking a hard look here and will put in place some measures to keep this under control,” said Funke Kupper, whose firm has proposed a three-pronged approach to cancel out certain high-frequency trading practices.

Trades of more than $1 million can take place in dark pools, off-exchange trading venues where buyers and sellers are matched anonymously.

But anything below $25,000, must be sent to the ASX or Chi-X, Funke Kupper said. In addition, for trades between $25,000 and $1 million, Funke Kupper said there should be a rule that any trade to a dark pool must have a “meaningful price improvement.”

The proposals are aimed specifically at certain high-speed strategies, Funke Kupper said, such as when these firms place orders without any intent of filling them. By doing so, the firms hope that their orders, which they often immediately cancel after placing them, distort the market and create inefficiencies from which they can profit.

To be sure, Australia doesn’t have some of the broader market structure problems that have become particularly harmful in the U.S. So-called “maker-taker” pricing, where exchanges offer rebates to firms that provide liquidity, doesn’t exist in the country, according to Funke Kupper. That reduces the incentive to trade purely for those rebates, which can impact pricing across market venues.

In addition, the execution fees charged by Australian exchanges are based on orders and not merely on executed trades as they are in the U.S.

The proposals from the ASX are self-serving in that limiting competition in trading would naturally drive more action to the exchange, which still handles more than 95% of all trades. But after the technical problems in the U.S., Funke Kupper said there is increasing support for the proposals from the regulator, government and fund managers.

“Think of real liquidity as a bucket of water. High-frequency is just a sheet of water, it’s simply not there when you put your hand through it,” he said.


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