Australia Model Curbs Speed as CEO Says U.S. Too Far GoneAdam Haigh and Sam Mamudi
In Australia, where high-frequency trading firms are half as pervasive as in the U.S., the head of the biggest stock exchange has a message for Americans who would rein them in: forget it.
“The way the U.S. market structure has been set up creates serious problems,” Elmer Funke Kupper, the chief executive officer of Sydney-based ASX Ltd., told Bloomberg News on the sidelines of a conference March 24. Efforts to rectify that are “very late and unlikely to succeed,” he said.
Advantages that are hard to replicate in the U.S. help Funke Kupper curb speed traders. Australia restricts alternative exchanges, solidifying ASX’s near-monopoly and reducing high-frequency arbitrage. By contrast, American trading is spread across more than 50 venues. ASX doesn’t offer payments to traders for orders, unlike in the U.S., where a system of fees and rebates known as maker-taker helps keep HFT in business.
“Australia has been increasing the vigilance in HFT regulations especially in regards to transparency, but they had the advantage of learning lessons from challenges the U.S. has already experienced,” Danielle Tierney, Boston-based analyst at Aite Group LLC, said in a phone interview yesterday. “They also have much smaller volume, and far fewer complications in their market structure than the U.S. does.”
Trading attributable to the strategies at the center of Michael Lewis’s new book hovers around 25 percent of volume in Australia, compared with about 50 percent in the U.S., according to estimates from Tierney. Another proxy for high-frequency trading, the amount of buy and sell requests that go unfilled, is about half as high in Australia as in America.
High-frequency trading is the catch-all term for software-driven strategies that employ superfast computers to capture price discrepancies by posting and canceling orders at intervals measured in thousands and even millionths of seconds.
Whether it can be tamed in the U.S. or not, regulators are looking for ways to try. New York Attorney General Eric Schneiderman opened a probe into whether U.S. stock exchanges give the fastest firms improper advantages. Federal agents are investigating whether HFTs break U.S. laws by acting on nonpublic information to gain an edge over competitors.
Debate about whether exchanges are fair has raged all week after Lewis said in “Flash Boys” that the U.S. stock markets are rigged, enriching high-frequency traders. The fragmentation of U.S. trading and the maker-taker system of charging investors for trades while paying brokers helps HFT thrive, he wrote.
The Australian equity landscape is less dispersed. ASX accounted for 86 percent of on-exchange trading in the past 12 months, with the remaining 14 percent through the No. 2 market run by Chi-X Australia Pty. The Nasdaq Stock Market is the biggest U.S. exchange with about 17 percent of volume in March, according to data compiled by Bloomberg. The New York Stock Exchange and NYSE Arca are the only two other exchanges that had at least 10 percent during that period.
Australia has restricted some trading in dark pools, private venues that don’t publicly display prices, tempering competition for ASX. The Australian Securities and Investments Commission in May introduced a rule banning such trades unless they beat the best public quote, leading to a 40 percent reduction in non-block transactions from the prior two months. The rule only applies to below block-size trades.
Off-exchange volume makes up almost 40 percent of U.S. trading. In Australia, the government curbs have helped keep the comparable figure at 24 percent, according to data compiled by ASX.
“The more fragmented the market is, the more opportunities there are for HFT who look for differences across that market to exploit,” said Carole Comerton-Forde, a finance professor at the University of Melbourne who studied market structure across Australia, Europe and the U.S. after completing a PhD in 2000.
The regulator says Australia’s $1.4 trillion cash-equity market would not benefit investors or the companies which listed on the exchanges by having a maker-taker system similar to the U.S.
“We believe there is sufficient evidence to conclude that maker–taker models, where the market operator pays a rebate, do not promote market quality or market integrity,” the ASIC said in a March 2013 study.
Neither Funke Kupper nor Lewis are the first to criticize the protocol. Chris Concannon, president of one of the biggest high-frequency firms, New York-based Virtu Financial Inc., told Bloomberg News in December that regulators should consider an across-the-board reduction in trading fees to curb the use of dark pools.
Jeff Sprecher, the CEO of IntercontinentalExchange Group Inc., which bought the NYSE in November, says maker-taker harms the market. He’s met with the U.S. Securities and Exchange Commission to encourage a ban on the practice. Lewis contends in “Flash Boys,” that maker-taker encourages needless trading.
“I don’t like maker-taker,” Sprecher said in October. “You shouldn’t pay people to trade.”
Another sign of Australia’s success in limiting HFT is that fewer orders go unfilled due to a charge on orders. High-frequency strategies are usually defined by the use of computers to post and cancel orders in times measured in thousandths and even millionths of seconds. In the six years through the end of 2013, the average order-to-trade ratio in Australia was 4.2, less than half that of the NYSE, according to data compiled by Sydney-based research firm Capital Markets CRC Ltd.
“HFT in this part of the world is almost irrelevant,” said Michael Aitken, a professor at Capital Markets CRC. “In many cases it’s just too expensive and you can see the low order-to-trade ratios. It shows regulatory decisions have impact.”
With all the market structure difference between the U.S. and Australia, Funke Kupper says the U.S. is fighting a losing battle after Schneiderman opened the investigation into whether U.S. stock exchanges provide high-frequency traders with improper advantages.
“I don’t believe the people operating in that market are doing anything illegal,” Funke Kupper said. “So you have to change the structure not go after people. You’ve created an environment where that becomes a self-perpetuating model.”