Will ASX Limited ban high-frequency trading?

ASX faces potential retail investor revolt unless clamp comes down on HFT

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Last week I wrote about high-frequency trading (HFT) and the furore that has erupted over the practice.

Today, Bell Potter’s Charlie Aitken labelled it as ‘legalised scalping’, and warned the ASX Limited (ASX: ASX) that the national stock exchange was headed for trouble, if it allowed the practice to continue.

Mr Aitken says most investors he had spoken to believe that the growth of HFT had made the equity market a ‘rigged casino’. In a note to clients he said, “This is all a question of market integrity, if private investors believe the market is rigged against them, and in one aspect they are right because they are executing at slower speeds than others, then you can’t blame them for not wanting to participate.”

Mr Aitken noted that trading volumes on the ASX were falling, and we have noted that the level of participation in the equity market by retail investors was sliding. From a high of 55% in 2004, those Australians who own shares has dropped to 38% in 2012. And the ASX’s own survey in 2012 showed that only 42% of people said they intended to buy shares in the short-term.

The conclusion appears to be that the ASX practice of favouring HFT firms has pushed many retail investors out of the market. Mr Aitken says the ASX could also open itself up to shareholder class actions, with “Mum and Dads being ripped off.”

In our view HFT has no place on the stock exchange. After all, it was designed as a market place to bring together investors with funds to invest, and companies seeking to raise capital. It seems current world stock markets have moved far beyond that, and virtually serve that purpose as a sideshow to trading.

Allowing some investors (HFT traders) an advantage over the rest of the market is patently unfair and needs to change. And it’s not just retail investors that are being impacted. Fund managers like Perpetual Limited (ASX: PPT), BT Investment Management (ASX: BTT) and Platinum Asset Management (ASX: PTM) could also be facing the same issues caused by HFT.

Foolish takeaway

The Australian Securities and Investments Commission (ASIC) is reported to be reconsidering plans to slow down HFT trades by 500 milliseconds. But that only partly fixes the problem – a better way would be to ban it altogether.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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