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Hewison Insights
High Frequency Trading (HFT)

Too Little Too Late..?

John Hewison
Founder and Director
20 Sep 2012

It was interesting to read that a group of leading fund managers have spoken out against High Frequency Trading (HFT) practices, accusing them of market manipulation.

HFT is a computer based trading system based on logarithm equations (find a pimple faced PhD in Maths to explain that to you), that is used by brokers and holding stocks for very short periods of time. The result is a high level of trading activity that accounts for about 20% of trading activity in the Australian share market (ASX). This can disadvantage some “normal” investors through “front running” – that is jumping ahead of them via high speed trading mechanisms. But more importantly, has the potential to go horribly wrong and cause major market crisis, as it has done recently in the US.

Call me old fashioned but my understanding of the ASX is that primarily, it is a market designed for companies to raise capital from the public sector for operational funding. Its secondary function is to provide investors with a market for the orderly and fair trading in Australian company shares. But what we have witnessed in the recent past is a market polluted by various forms of synthetically manufactured market mechanisms intended to profiteer through market manipulation at the expense of legitimate share investors. HFT is just another of these mechanisms.

Following the Lehmann Brothers collapse in October 2008, we saw widespread and vicious attacks on many Australian shares, in particular the major banks, by short selling (selling stock you don’t own in massive quantities to force the price down and then buy it back for a profit). Some companies did not survive these attacks. The impact on private investors and superannuation fund savings was enormous.

It is now being suggested that HFT could cause major spikes and troughs in share prices which could result in similar outcomes to short selling.

There are rules in place where it is compulsory for public companies to keep the market informed of any matter that might unduly influence its share price. So how is it that the ASX and other market players can argue that blatant manipulation through illegitimate market trading mechanisms can be allowed? How is it that the regulator cannot maintain fairness in the market?

One clear issue is that the ASX cannot continue to be the major recipient of profit derived from share market activity and also be responsible for upholding trading standards and fairness; this is a clear conflict of interest.

It is time to take a stance against the market manipulators and to protect the interests of the Australian investing public and the companies that rely on the ASX as a market for the fair trading of its shares. 

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.