High frequency trading killing the art of stock market investing

High frequency trading may have had its day in the sun

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 18, 2012 4:19 pm AEDT

High frequency trading may have had its day in the sun, writes Mike King of The Motley Fool.

In what might be a scene from a science fiction movie, computers, directly connected to the ASX's Stock Exchange, are firing off hundreds and thousands of trade orders every second, dominating our market, running roughshod over 'mum and dad' investors trying to trade shares to fund their retirement – and end up causing a market crash.

Ok, it's not quite that bad, but it's obviously a nightmare scenario to many market participants, including heavyweights like UBS, which regularly handles more than 8% of the total volumes traded each day.

Controlled by programs (algorithms) developed by humans and based on stock trading patterns and human psychology, trades of normally unmarketable parcels of shares have flooded the market.

Who wants to buy 6 shares in Billabong International (ASX: BBG), for 84.5 cents each, or 9 shares at 80.5 cents? How about 16 shares in Ten Network Holdings (ASX: TEN) at 31.5 cents each? And it's not just one trade order – there's four of them, all exactly the same.

UBS and other market heavyweights including Perpetual Limited (ASX: PPT) and Australian Super, echoing the views of many retail investors, have called on the regulators to take more stringent action against High Frequency Trading (HFT), including slowing down the speed at which orders can be placed, and charging for every trade order that is placed.

Just today, several stocks including Ansell Limited (ASX: ANN) and Aristocrat Leisure (ASX: ALL) spiked higher, when the ASX opened for trading. Speculation has placed the blame on a black-box trading system, and the Australian Securities and Investments Commission (ASIC) has said it was aware of the surging share prices and was investigating.

High frequency or algorithmic trading proponents claim that it provides liquidity, but that appears to be a dubious claim. The value of shares traded on the ASX has halved in recent months from around $6.5 billion a day to around $3 – $3.5 billion. Much of the blame is being laid at the doorstep of HFT.

ASX Limited (ASX: ASX), the company that owns and runs the Stock Exchange, appears to be in a quandary. It wants HFT and believes in the benefits it brings to the market. On the other hand, the evidence points to HFT reducing trading volumes, and consequently the ASX's revenues.

Foolish takeaway

HFT appears to be creating an unfair market, and changing the purpose of the stock exchange. After all, the Exchange's main purpose is to allow companies to raise equity capital. How HFT trading fits into that, I have no idea.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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