asic warns over computer generated trading ...

This is a very interesting interview which was on ABC's 'The World Today' today, which is well worth listening to imo.

ASIC warns over computer generated trading

TRANSCRIPT

ELEANOR HALL: The corporate regulator issued a warning today about automated trading on the sharemarket.

Last year's "flash crash" on Wall Street was blamed on computer generated trading.

The Australian Securities and Investments Commission says it's concerned about trading formulas which could affect the sharemarket here.

Finance reporter, Sue Lannin.

SUE LANNIN: The Australian Securities and Investments Commission took over the supervision of the sharemarket from the market operator, the Australian Securities Exchange in August last year.

Since then there has been an increase in the number of possible cases of market manipulation referred for investigation, including 17 possible cases of insider trading.

ASIC's head of market supervision, Greg Yanco says he's concerned about leaks involving takeovers.

GREG YANCO: These are instances where we've seen people having access to document management systems that aren't properly locked down.

So for instance everyone in a firm having access to certain information when that information should be restricted, it should be restricted access to only those people that should be, need to be aware of a pending corporate action.

SUE LANNIN: One of ASIC's other areas of concern is the use of computer generated trading known as algorithmic trading to trade shares.

Deutsche Bank was fined after a bad trade affected the Share Price Index Futures and pushed the index down.

Greg Yanco says ASIC has increased the action it's taken over automated trades.

GREG YANCO: It's not high frequency trading that we've drawn out in this report, it's more about badly written or poorly written algorithms that cause spikes in the market or may cause a cascading effect.

So for instance in some cases we've seen stop loss orders that are triggering other stop loss orders and there's potentially a cascading effect.

SUE LANNIN: Now one of your areas of concern is exchange traded funds, so they're funds that track the value of underlying assets like shares. Why are you concerned about those funds?

GREG YANCO: Well we're not concerned about the products themselves, what we are concerned about is when retail investors choose to buy, for instance, an investment in an exchange traded fund and they go into the market and just buy at the current offer price without having a look at what the underlying index is and seeing whether there is a disparity between the two.

SUE LANNIN: Carole Comerton-Forde is an expert on sharemarkets from the Australian National University.

Does there need to be more regulation so there's fewer problems with computer generated trading?

CAROLE COMERTON-FORDE: I think the most important thing is testing - ensuring that there's rules in place that require participants to test their algorithms before they're going into the market and to ensure that there's controls in place for in the extreme that orders can be cancelled and not make it into the market if they are going to cause extreme volatility.

SUE LANNIN: Now high frequency trading was blamed for causing the flash crash that we saw on Wall Street last year, was that the reason?

CAROLE COMERTON-FORDE: I don't think so, I think the initial reaction from the market was that it was high frequency trading, but I think the subsequent reports that came out from the SEC (Securities and Exchange Commission) and CFTC (Commodity Futures Trading Commission) suggested that there were a range of factors and high frequency trading was probably not the main one.

It was a combination of a lack of coordination across the different markets in the US and their different rules in responding to uncertainty.

ELEANOR HALL: That's Carole Comerton-Forde from the Australian National University speaking to Sue Lannin.


Source: http://www.abc.net.au/worldtoday/content/2011/s3269090.htm