The ASX doesn’t really live at Bridge Street in Sydney’s CBD, a block back from Sydney Harbour, where it has corporate offices.
That’s the shop front. The real heart of the stock exchange is a data cabinet about the size of a modest wardrobe, tucked away in a corridor in a very secure room in a purpose-built data centre at Gore Hill on the North Shore of Sydney.
From the outside the data cabinet is unremarkable, unimpressive-looking piece of equipment for a market where each day hundreds of thousands of trades are placed, and billions of dollars are added to, or lost from, market capitalisation.
Accessing the data centre involves a retinal scan on a security-cleared person. Fingerprints won’t do. There’s also a door code, and a lot of doors, cameras and a lift.
Airconditioning units are on the outside of the room, so maintenance teams don’t need to enter.
It’s in this secure room that high frequency, or flash, traders, connect their electronic automatic trading boxes directly to the ASX data hub itself where trades are completed. They operate alongside other market players including news and information providers.
The flash trading boxes are powerful computers with programs which buy and sell shares based on a set of rules – what’s known as algorithmic trading – at incredible speeds.
The ASX calls the data room the Australian Liquidity Centre, a market which connects market players to the ASX itself and to each other, a community of traders, brokers, banks, trading platforms and data providers.
Unlike other markets, such as in the US, local high frequency traders can’t buy an advantage. They are all connected to that unimposing data cabinet, the blinking heart of the ASX, via cables of exactly the same length.
It doesn’t matter where in the secure, humidity and temperature controlled room a trader’s data cabinet sits, it will always be the same distance, the same access, as everyone else to the ASX cabinet. The data cables snake around the room on overhead ducts, all leading to the same box.
A shorter cable would mean data had less distance to travel down the fibre and therefore could be acted on before a fraction of a second before anyone else. A millimetre short or longer, amazingly small margins for data to travel, could mean differences of millions of dollars in trades.
The ideal for flash traders is to be first, to have processed data before anyone else, and act on it. It doesn’t have to be a big margin, just a tiny fraction of a fraction of a second. And many will go a long way to get that slim jump.
One trader has added a microwave dish to the Gore Hill tower. He takes the data out of the ASX by cable and flicks it to the microwave and over to Chi-X, the other local stock exchange, hoping that the microwave will be just that little bit faster than a physical cable and will arrive in time to take advantage of a difference in price between the two centres.
In its own environment, the ASX can control the cable to a millimetre but once the data leaves the building that control is lost.
After setup, the traders rarely visit the liquidity centre. Updates to the boxes, the re-sets for their trading strategies, are done remotely as often as needed.
“The traders came here three years ago and built it and it’s now connected to the outside world,” says David Raper, the ASX’s executive general manager, trading services.
“Once a day, once a week, once a month they will strip down the trading strategies in there, rebuild them and send them back down the wire.
“They won’t come here. If something breaks, we replace it for them.”
And on a global scale, the ASX is a good deal. A cabinet costs bout $2,500 a month. In Chicago, you would pay $15,000.
The philosophy is that the more customers, the better the data and the better the community.
“It’s exponential,” says Raper. “It was important that we could get as many people as quickly as we could.”
He points across the room. “That empty space over there, a big chunk of it has already sold and another 50% is under negotiation. We’ll get to 80% to 85% full here very soon. If you want a rack, you’d better move quickly.”
The centre of the ASX is just one rack, a small cupboard with flashing lights, not as big as some of the steel caged units around the centre. As added security, many of the tenants have added steel mesh, and in some cases full metal sheets, around groups of cabinets.
“Forget what you see with your eyes and think about what an old trading pit use to look like,” says Raper. “Hundreds of people all trying to communicate together. That’s what this is now, the same institutions which used to stand on that pit, and they are all connected to each other and us now, communicating constantly. The LED lights are the colourful jackets.”
But this trading pit is very quiet, the old shouts are now only the movement of electrons.
Where there is noise is the discussion, and suspicion, about whether flash trading is good or bad. A review in 2013 by corporate regulator ASIC could find no adverse impact on the market.
“We did not find any fundamental deterioration of market quality or systematic abuse that threatens the integrity of our market,” ASIC said. “In fact, we found that the Australian market is generally of high quality and integrity.”
That study estimated that high frequency trading represented about 27% of turnover on ASX 200 stocks. In the US, flash traders can make up as much as 75% of trades on any given day.
Others see flash trading as giving an unfair advantage which retail investors have no hope of emulating.
According to researchers at the University of Sydney Business School, high frequency share trading is having a toxic effect.
Dr Amy Kwan, who used to work at the corporate watchdog ASIC, and Dr Richard Philip, a former trader, say the activity queue jumps most other investors.
“High-frequency traders gain from their speed advantage at the expense of slower institutional and retail traders,” says a report on the study. “And this advantage primarily comes from dealing on advanced information not available to all investors. This behaviour, known as front running, is seen by many investors as predatory.”
However, Marvin Wee, Associate Professor of accounting and finance at the University of Western Australia, sees high frequency trading (HFT) as not all bad.
“High frequency traders use computers and complex algorithms to move in and out of stocks very quickly,” he writes in The Conversation.
“These movements are typically milliseconds apart, involving the trading of very large volumes of shares. Some market commentators believe HFT has intensified the recent volatility by causing the market to react rapidly to news that may not be significant. In response to the market swings that we are currently experiencing, some argue that the reactions observed are much more volatile than what is expected.”
Wee, and colleagues at the University of Western Australia and University of Nagasaki, studied the effects of flash trading on the Tokyo Stock Exchange.
“We found evidence to support the argument that trading by high-frequency trading firms improves market quality during normal market conditions,” Wee says. “This is consistent with prior research conducted using data from the New York Stock Exchange.”
ASIC is currently revisiting its investigation of high frequency trading in Australia and is expected to release its findings before the end of the calendar year.