Survey records negative sentiment toward High Frequency and Algorithmic Trading
The rise in algorithmic and high frequency trading (HFT) on the Australian Securities Exchange (ASX) and global stock exchanges has raised considerable alarm among investors, analysts and other market participants.
In an effort to ascertain perceptions in the market relating to algorithmic trading and HFT and the impact both have on investor sentiment, activities and decisions, Australasian investor relations firm, Professional Public Relations (PPR) conducted a comprehensive survey using the analytical capabilities of Orient Capital, a global leader in share ownership analysis, market intelligence, investor communication, proxy solicitation and shareholder management technology.
The survey, conducted between September 5 and October 7 this year, included 1754 respondents, of which 73.5 per cent were retail investors, 12.7 per cent were private client advisor/brokers and 5.8 per cent were fund managers.
The remainder included analysts, institutional representatives and listed company representatives.
Almost half of all respondents were focused primarily on ASX-listed small cap/micro-cap companies, while 25.5 per cent were focused on ASX 300 companies, 20 per cent on ASX 200 companies and 5.5 per cent on ASX 100 companies.
There is a general lack of understanding for the market on High Frequency and Algorithm trading.
Many respondents weren’t sure of the difference between High Frequency Trading and algorithmic trading and assumed they are the same thing.
Despite this, they still believe they have a negative effect on the market.
While nearly all respondents (97.6 per cent) had heard of algorithmic trading and HFT, a smaller proportion (70.3 per cent) believe they adequately understand them.
“The increased use of algorithmic trading and HFT has caused much concern among investors, analysts and generally anyone who believes the ASX should be a fair and transparent market,” PPR National director of investor relations David Tasker said
“This concern is demonstrated by the large number of participants who completed the survey and the extremely negative views towards algorithmic trading and HFT.
“Regulatory bodies such as ASIC need to act urgently to curb the current impact of algorithmic trading and HFT on the ASX and its ability to act as a fair and transparent market.”
Negative market sentiment
A key finding is the generally high level of negative market sentiment towards algorithmic trading and HFT, with nearly all respondents (96.6 per cent) believing both are having an adverse impact on the ASX.
Of the respondents, 83.6 per cent believe algorithm trading and HFT are having a major negative impact while 13 per cent believe they have a minor negative impact.
A fair and transparent market?
A significant majority of respondents associated algorithmic trading and HFT with a lack of market transparency, openness and fairness.
Of the respondents, 89.3 per cent believed algorithm trading and HFT were impacting the ability of the ASX to conduct a fair and transparent market, while decreased fairness and market transparency were regarded by a significant majority (90.3 per cent) as the biggest impact of algorithmic and HFT trading on the ASX.
Only 4.1 per cent of respondents believed increased liquidity was the biggest impact of algorithmic trading or HFT on the ASX while 2.9 per cent believed decreased liquidity was the biggest impact and 0.6 per cent linked it to increased fairness and transparency of the market.
A large proportion of respondents were reluctant to trade on the ASX as a result of the presence of algorithmic trading or HFT with 78.1 per cent either agreeing or strongly agreeing that it made them reluctant, with 85 per cent of retail investors agreeing or strongly agreeing.
The effects of algorithmic trading and HFT are generally seen as consistent in both a bull and bear market.
Most respondents (37.9 per cent) disagreed with the statement that algorithmic trading and HFT would not have a material impact in a bull market.
Measures to limit the impact of algorithmic trading and HFT
Respondents were varied on the preferred methods of controlling the impact of algorithmic trading and HFT on the ASX.
Banning algorithm trading and HFT was cited by the majority (57 per cent) of respondents as the preferred method.
Of the respondents, this was cited by 61.7 per cent of retail investors, 52.9 per cent of private client advisors/brokers and 30 per cent of analysts.
Placing a minimum order limit was the next most-cited response, with 16.7 per cent of respondents believing it to be the most preferred method.
This was cited by 24.4 per cent of listed company representatives, 17.2 per cent of retail investors and 6 per cent of analysts.
Meanwhile, 12.9 per cent of respondents thought the best way would be to introduce tougher regulation of HFT systems.
This was cited by 26.8 per cent of company representatives, 28 per cent of analysts and 10.1 per cent of retail investors.
ASX’s facilitation of algorithmic trading and HFT
The vast majority (76.7 per cent) of respondents were of the view the ASX should not be allowed to facilitate algorithmic trading and HFT compared to a minority (12.6 per cent) of respondents who believed the ASX should be able to facilitate algorithmic trading and HFT.
The remaining 10.7 per cent of respondents had no opinion on the matter.
Regulatory powers
On the subject of ASIC’s regulatory power in relation to algorithmic trading and HFT, a majority (66.5 per cent) believe ASIC had inadequate regulatory and supervisory powers and tools.
A minority (14.6 per cent) of respondents believe ASIC has adequate regulatory and supervisory powers while 19.2 per cent had no opinion on the matter.
David Tasker
National Director, Investor Relations – Professional Public Relations
