Industry Super Network (ISN) has claimed that high frequency trading (HFT) is creating a stock market that caters to speed and not capital allocation – and costs long-term investors more than $1.5 billion per year.
ISN has conducted market analysis which estimates the opportunity cost to long-term investors using the share of traded volume interposed by high frequency traders and the average daily spread of all ASX 200 stocks.
The analysis found that long-term investors, such as superannuation funds and individual investors, were forced to pay the spread between best purchase price and best selling price of a stock when high frequency traders interpose.
ISN director of policy Zachary May said the research was the first to quantify the cost of HFT. This type of trading represented 22 per cent of total market turnover while creating a market advantage for those who use high frequency trading, particularly boutique speed-trading houses and large banking and financial institutions.
"A market system that caters to speed, rather than capital allocation, bestows an uneven playing field and gives traders whose strategies are based on relative speed advantages a leg-up," May said.
ISN said HFT created an uneven playing field by interposing between regular buyers and sellers and creating another transaction. By using speed to act ahead of other buyers and sellers in queues, they force buyers to purchase stocks at higher prices and sellers to sell at lower prices.
ISN called for the banning of HFT in September 2012 in a submission to the Australian Securities and Investments Commission, which stated that while it would take action it believed the case had been overstated.
Despite this, ISN has continued to push for changes surrounding HFT and is using the release of its market analysis to call for market reforms.
May said ISN supports the use of electronic call auctions in which all trades in a stock auction receive the same price and happen at the same time.
"Doing so would go a long way toward bringing the focus of markets back to exchanging shares and allocating capital, while also supplying resilient liquidity."
