High frequency trading killing the art of stock market investing

High frequency trading may have had its day in the sun

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

If you only invest in one company this year, make it our "Top Stock for 2012-13". Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

More reading

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »