how it's done, page-4

Dnvan:

ASIC have had a pirate copy of my submission to parliament for some time, so today I made it legitimate for them:

here is copy of my letter to them:

06 August 2010.


Market Disciplinary Panel,
ASIC
Level 24, 120 Collins Street,
MELBOURNE. 3000.

Dear Sir, Madam.

I refer to the attached submission to the Members of the House of Representatives and Senators of the Federal Government of Australia titled Algorithmic Trading in Australian Share Markets

I am aware that you are already in receipt of this document, however, as the author, I wish to provide you with the most updated version possible, particularly from the viewpoint that it is a living document and subject to daily revision and addition.

You will note that the document contains commentary from numerous persons involved in the Capital Markets; that this is deliberately provided in order that a clear representation is made from a cross section of the many people involved in the retail share market.

Additionally I have included numerous links to articles both from within Australia and overseas.

These articles while not specifically selected for their critical content are unified in the damming of Algorithmic trading and of the influence which can be exerted using this form of trading as a means by which the price of a security can be manipulated.

The content of the submission is wide-ranging and critical of Algorithmic Trading in that this form of trading creates an imbalance of opportunity, and this imbalance is contrary to natural law and to the intent of the Capital Market rules.

More alarming is the ability of the operators of this form of trading to control the price of a stock during non-peak trading activity, noting that any form of price control of a security is specifically contrary to the rules.

Mindful that the original intent of Algorithmic Trading was to automatically handle large client orders by subdivision and time-lapse purchase, we are now confronted by trading programs which contain numerous hidden agenda parameters, for the most part known only by the owner and the writer of the program, all but impossible to extract without lengthy and time consuming analysis.

The original intent was confined to operation within the rules, but because of external influence and demands for improvements there now exists hundreds of exceptionally complex trading algorithms which neither ASX nor ASIC are able to interpret fully regardless of any perception that ASX may or may not wish to interfere with a lucrative source of revenue.

This then is the crux of the submission I have written: That the watchdog is inherently incapable of carrying out duties of Market Supervision because they do not have the staff with sufficient understanding of Algorithmic Trading programs to identify the aspects of the programs which are in question, even if ASIC was able to obtain access to intellectual property for analytical purposes.

The ASX has persistently turned a blind eye to the thousands of legitimate complaints submitted to them, in such manner that they have been accused of being self-serving in their application of the interpretation of the rules.

The question then arises as to if this problem can be controlled. The extent of the problem, the staffing levels and present ability of ASIC and the probable reluctance by ASX to assist in an investigation would suggest that is not possible to control the problem in the short term, and that the immediate solution is to suspend the activity until control can be established which ensures fairness for all.

In conclusion: I found this bit here on HC

The computers are able to do something normal buyers and sellers can't do. They can pick a price they want a security to trade at and then fill in all the necessary trading volume needed to get the price of the security to that point. In other words, you can program computers to rig markets.

In this new rigged market capitalist model, the bank picks the price it wants a security to trade at and the computers buy and sell with each other until that price is reached; thus providing an audit trail of trades that looks on the surface like actual price discovery.

This is price manipulation and is specifically excluded in the Corporations Act, section 1041(a) and 1041(c).

Yours truly,