Fears about HFT dislocated from reality
[http://www.smh.com.au/business/by/Gareth-Hutchens Gareth Hutchens] posted [http://www.smh.com.au/business/fears-mount-over-ultrafast-trading-20121029-28dn9.html this followup] to the weekend [http://www.smh.com.au/business/sell-and-buy-in-the-blink-of-an-eye-20121026-28b55.html article]. Lets look at the weekend article first:
Not everyone thinks so. Some sections of the financial industry are privately seething that Funke Kupper and others have been whipping up hysteria about high-speed trading. In the bars of Sydney's financial district, the topic is waved away with scorn. ''It's just become a scapegoat,'' is the refrain.
Funke Kupper is both responding to concerns in the public about HFT, and at the same time helping to further those concerns. He is in a difficult position. On the one hand you have people reading about HFT in the US, and incorrectly translating that to Australia. This creates a heightened sense of concern, which fed with the appropriate (low) level of media intelligence on the topic leading him to the conclusion: beat them or join them.
Beating them (read: educating them) is a difficult thing to do. There is certainly an argument that HFT is now being defined as all-things-evil, and the scaremongering is way overboard. If you try this angle you are only going to be painted as a sympathiser who, being paid good revenue by HFT firms, is trying to protect one's own interest. Joining them (read: laying the boot into HFT) is really the only choice you have available, and trying to position the ASX as the advocate of the Aussie Battler is the only way to go. Sorry HFT.
The other reason is, of course, it's the right thing for the ASX's long term business. ASX relies on being a diversified marketplace - that is, having all different types of liquidity - not just the stuff the computers generate. In fact, the market is a bit like any ecosystem - the predators will go wherever the prey are. The ASX would become a "ghost town" if the non-HFT left, as there would be nothing left for predatory HFT to feed off. ASX needs to be very careful the non-HFT liquidity does not go elsewhere. What if participants started feeling that Chi-X (or dark pools?) was a safer place to trade? You can afford to beat-up on HFT (computers don't get offended) as they wont go anywhere. The non-HFT is different: they now have a choice, and much more feelings. If they get skittish and leave - the HFT goes with them. Sorry ASX.
In fact, the ASX tried an experiment on creating a venue with no-one other than HFT on it: it's called [http://www.asx.com.au/tradingservices/asx-purematch.htm PureMatch] and was hailed as a high-performance market that trades faster than [http://www.asx.com.au/tradingservices/newmarketservices.htm TradeMatch]. I've only seen a few tumbleweeds over there.
[[image http://images.smh.com.au/2012/10/26/3747711/2710speedtrading_353px-300x0.jpg]]
One issue facing academics is the difficulty in identifying HFT. There are many firms specialising in this kind of work ([www.nanex.net Nanex], [www.hftalerts.com HFTAlerts]) but they are US-centric and focus on certain kinds of HFT activity. The kind of activity they focus on is the kind that happens in the US, but not here in Australia. There are a lot of technical reasons as to why it is difficult to do, but one I am planning to solve (in Australia) shortly. It's not impossible - but currently no-one (other than the HFT firms) have the raw data to do it.
How then, can a chart like this represent numbers of HFT activity on the various markets? Quite simply, they can't - and I think they are way overestimated. In Australia this 30% figure includes a lot of what I would call AT (algorithmic trading) activity that is not high speed. In terms of predatory HFT, I'm thinking sub-5%. There's isn't many papers or clicks in a story telling you to to be //less// afraid.
[[image http://images.smh.com.au/2012/10/26/3747724/2710venueturnover_353px-300x0.jpg]]
Unfortunately this image does not acknowledge the source of the top ten "stocks at risk". Evidence please - I'd love to know! I doubt there is real a "top 10" of stocks that predatory HFT targets: they'll go wherever the opportunity exists, and that will change quite quickly!
Funke Kupper believes that this fragmentation is a bad thing: the more the market splinters, he says, the more liquidity will get sucked from the main exchange into smaller off-market trading areas, making it harder and more costly for companies to raise capital. And in an emergency, that could be particularly worrisome.
For an organisation campaigning against market fragmentation, they've sure tried to create a lot of it! Off the back of the monopoly-like TradeMatch market they created PureMatch and VolumeMatch ([https://www.asxonline.com/intradoc-cgi/groups/participantservices/documents/communications/asx035012.pdf RIP]). Separate venues, splintering liquidity - at least Chi-X only has one!
If your mantra is "fragmentation is bad" then we should be looking to achieve competition in ways that don't create it, right? Perhaps we can take a lesson from the NBN - where fragmentation is also bad, and competition (of a kind) achieved.
As they [computerised traders] see it, high-frequency trading has become a scapegoat, an excuse used by brokers to explain why the sharemarket is still a disappointment more than four years after the financial crisis.
So true - the discussion around HFT is confused in terms of who it is talking about (confusion between HFT and AT), plus it is certainly a scapegoat for many things it is not responsible for.
That said, that does not mean that //all// concerns about it are invalid. But perhaps the fact they are being raised is more to do with the need for brokers and traders to blame someone for their problems, rather than the real magnitude of the issues.
''While some say high-frequency trading provides liquidity, I know some very senior bankers that privately describe it as providing only 'phantom liquidity','' he [Greg Medcraft] told the FINSIA conference this month.
While this may be partly true, I would counter with three points:
- it's not //all// phantom liquidity - there is a mix of both
- for some, creating phantom liquidity makes them more money than giving you real liquidity
- get used to it: computers aren't going anywhere
What we need to do is change the economics of the market so it does not reward the generation of phantom liquidity. (see TimeMatch)
The article then focuses on some ASIC submissions by some buy-side views like Zac May from [http://www.industrysupernetwork.com/ ISN]:
As he explains it, big firms with the most money are able to see market information before anyone else, given the speeds with which they operate. They then act upon that information, buying and selling shares before the normal retail investor. He says the fact that the ASX facilitates this means the market is inherently unfair.
The ASX facilitates a number of different channels for market data: ranging from co-location (the fastest), broker gateways (still fast), consumer websites (fast), and the newspaper. The fact the ASX facilitates these range of speeds is not unfair. The speed is more to do with the recipient of the information, and how fast they process it, since the fastest information is available to everyone on an equal access basis.
What is unfair, is the fact that the rules of the market hand an advantage to those who get the data first. If slower traders prefer better prices over speed - why not let them? Why force them into a speed race that they don't want? (see TimeMatch)
The new survey of more than 1750 market participants - including retail investors, brokers, fund managers, and analysts - took place from September 5 to October 7. It found nearly all respondents (96.6 per cent) believed algorithm trading and HFT were having a negative effect on the ASX, with nearly 90 per cent of respondents believing they were hurting the ability of the ASX to conduct a fair and transparent market.
HFT has a PR problem, for sure. And by extension (association?) ASX does too - the only difference now is we now know the sheer scale of it: 97%!
My only surprise is where they found the other 3%!
It also found that 78 per cent of respondents either agreed or strongly agreed that algorithm trading and HFT had made them reluctant to trade on the ASX.
The only doubt I have about these figures is the motivational gaming involved: I do sense there is a inclination for traders to 'blame' AT/HFT for their woes. I have not found that people in general have any appreciation for the actual risks they run with HFT, or any knowledge about how HFT operates. Therefore, I would say while this does confirm there is a PR problem, it does not confirm that the actual technical problems are anywhere near this magnitude.
While I think TimeMatch and other reforms could solve the technical problems, and possibly the PR - I am concerned that solutions more optimised for PR (eg. taxes, minimum resting times, cutting the pipes, burning HFT at the stake) could achieve the PR outcomes more effectively. Hmm..
When asked about the best way to control the impact on the ASX of algorithmic trading and HFT, most respondents (57 per cent) said the best thing to do was to ban them. Placing a minimum-order limit was the next most-cited response.
Oops - I spoke to soon. These punters do not yet realise that the a minimum-resting time would do nothing to curb HFT in Australia. As I've blogged about previously, it would most probably make things better for the really fast HFT to pick-off the not-so-fast algorithmic traders. This could even enhance the arms race, following in the footsteps of the US SEC who have successfully "reformed" the market into a more profitable environment for HFT on many rounds.
However, retail investors were much more likely to feel reluctant to trade on the ASX, with 85 per cent of retail investors either agreeing or strongly agreeing that they were now reluctant to trade.
It would be an interesting experiment (along the lines of a drug trial) to implement TimeMatch on a couple of securities and test the PR and technical outcomes. No taxes, no restrictions, no intervention. Any takers?
I think the resulting data would give more insight into the real issues than a survey.
