High-frequency traders in Australia are getting smarter and generating higher revenue

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High-frequency traders are earning between $110 million and $180 million a year in Australia, according to estimates by ASIC, the corporate watchdog.

And their activity doesn’t appear, as suggested by some in the market, to be a key driver of transaction costs.

“It appears that higher levels of high-frequency trading assist in lowering transaction costs for low turnover securities,” ASIC says.

Flash traders use powerful computers with programs which buy and sell shares based on a set of rules — what’s known as algorithmic trading — at incredible speeds.

ASIC found that high-frequency traders are trading more aggressively than in 2012 when ASIC last reviewed local flash trading.

“ASIC has concluded that current levels of high-frequency trading and dark liquidity are not adversely affecting the function of Australian markets for businesses and investors,” says ASIC Commissioner Cathie Armour.

However, the latest review uncovered a number of traders with excessive order entry and cancellations in the ASX 24 market. This is being investigated.

This practice affects other market users because it prevents the prioritisation of their orders and forces them to pay more.

“We have asked ASX to consider what steps may be taken to discourage this practice,” ASIC says.

The level of high-frequency trading in Australia’s equity markets has remained steady at 27% of total turnover.

High-frequency trading has grown by 130% in the futures market since December 2013 to 21% of volume traded in the SPI and 14% of bond futures.

ASIC says these levels are not currently concerning but the watchdog will continue to monitor their development.

High-frequency traders have become more sophisticated, generating higher gross revenue and trading more aggressively than in 2012. They are also more active in mid-tier securities.

ASIC says predatory trading by high frequency traders does not appear to be excessive in our market, but they do investigate instances where there may be a breach of the law.

“Some institutional investors have become more sophisticated, increasingly managing their own order flow and execution decisions so they can limit interaction with predatory traders and improve their trading outcomes,” ASIC says.

Dark liquidity, or off-market trades, has remained reasonably constant at 25% to 30% of total equity market turnover.

However, its composition continues to change. Since ASIC’s 2012 review, there has been a shift back to using dark liquidity for its original purpose, for large block trades.

Feedback from stakeholders also indicated that there was now less concern with dark liquidity in our markets. Concerns ASIC previously held about the transparency and fairness of market participant-operated crossing systems have mostly abated.

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