HFT debate: talk your own book

HFT debate: talk your own book

Oct 23, 2012. | By: Fil

There has been some interesting discussion on HFT from significant players in the ASX broking community.

Firstly, UBS got into the debate by calling on HFT to be curbed:

“There are some things that we support which aren’t necessarily great for our business, but we think they are actually right for the market structure,”

UBS is implying that HFT is good for their business, but they'll play the honesty card and admit it's not great for the market as a whole. I'd say their share of HFT business is somewhat underweight, and therefore see a competitive advantage in laying into HFT in the hope that it will be curbed.

They generously offered to offload the ASIC supervision levy onto HFT's:

Under the UBS plan, certain trades that do follow ASIC-approved guidelines would be charged a 1.7¢ fee on every message sent to market. The money raised would replace a $27 million levy that ASIC charges stockbrokers and the stock exchange to pay for supervision of the market. High-frequency traders that act as market makers and agree to ASIC’s rules would be exempt from the fees. Rules might include forcing traders to leave orders in the market for a minimum of between half and one second, and placing limits on the minimum size and value of trades.

Nice try, but it's not that simple. If you were to target firms that do not leave orders in the depth for long, you're not going to find much on the ASX. The lifetime of orders in the depth has not changed markedly in recent years because, well, if you were a HFT firm you would realise while these strategies (quote stuffing) are used in the US - they aren't here.

What you would find is that predatory HFT in Australia, being predominantly liquidity taking, would not fit the profile of what is being described - and therefore not pay anything extra. Here is a common problem with the "torch the bastards" reform approach: HFT is hard to define, and often does not even match your stereotype.

What if no-one sent these orders - who would pay the supervision levy then?

Similarly CBA got into the discussion with a number of pitches to similarly push their corporate preference: leave HFT alone.

There is a contradiction here:

“If HFT is actually providing liquidity and not distorting the market, why does it matter?”

If that is true, then it does not. But that "if" is not given for all of HFT.

“Our view is that it’s somewhat disingenuous to say that liquidity pools are bad because of HFTs, as some liquidity pools don’t have any HFTs.

I think the case against dark pools (lead by the ASX) is in relation to lack of regulation/licensing and liquidity fragmentation. HFT participation is only a potential additional concern, not a core reason for being opposed to it.

HFTs and liquidity pools are different concepts. CBA won’t allow any HFTs into its liquidity pool,” MacGregor says.

So if the implication is true that HFT is good (liquidity, not distorting, all that) then why does CBA not allow them into its liquidity pool?

“This enables execution away from predatory HFT funds...

Right - so predatory HFT is bad, but you think that is OK in the public market, but won't let it into your private pool?

Sounds like you're happy that the lit market has become more dangerous (real or perceived), bolstering the benefit of your own internal matching that doesn't let the bad guys in?

It does seem your views on all this are very proprietary and, like UBS, designed to bolster your own interests. We should view them in that context.

yet also provides the potential for better prices and quicker execution for retail investors.”

I am hoping this is a mis-(non?)quote. Better prices yes, quicker execution than HFT? Hmm.


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