Hi Kimbo and everyone else interested in the action we are taking to alert the authorities about the BOT problem.
I also received the standard reply from ASIC so I drew up a response to send to our MPs, Senators and the Treasury.
I must admit parts of the document were gleaned from other posters on Hot Copper so I would like to acknowledge those posters from gwaihir, maaze, stockwatcher,naveen and all the other posters who have researched the problem and are doing such a great job to try and make it public knowledge. Apologies as I have plagerised some of your material which has been reproduced here.
My next post will be a mailing list for all the people making our laws who ASIC suggested we contact.
Please feel free to use any or all of the document to send to the MPs or post on any other trading forums.
I think it is important to make our politicians aware of the problem and I apologise about the length of the post.
I have also posted this in the MEO forum.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Dear Sir/Madam,
I would like to draw your attention to an ever increasing problem, regarding the introduction of trading software called algorithmic trading bots, that is testing the foundation of the Australian Financial Markets and the trading of stocks through the Australian Securities Exchange (ASX).
In this correspondence I intend to outline the problem as I see it whilst calling on comments by other participants in internet discussion forums, including Hot Copper, and media commentators on the world financial and exchange markets.
I will also indicate which Australian Acts of Parliament are being breached by the practices creating the problem. I will also show how companies are being undermined and exploited which is affecting their owners (shareholders) investment.
The Problem.
There has been a significant increase in the level of inequitable share price manipulation that is happening every day on the ASX by well financed traders who have access to exclusive trading systems.
Various types of trading techniques have been devised since the concept of sharing the public ownership of companies and the trading of those shares began. These have always been acceptable whilst the market has been based on a level playing field.
However this has changed since the introduction of trading software consisting algorithmic trading bots (BOTS or ALGOs) which is sanctioned by the ASX This is software that has been programmed to take over the calculation and submission of trades at speed (measured in nanoseconds).
The ASX refers to two types of BOTS.
1. Execution algorithms which were developed to minimise the market impact of large orders and therefore reduce the costs of trading and trade close to the volume weighted average price of a security over a day (VWAP). 2. Situational algorithms which seek to profit from changes in data, information and events. Whereas an execution algorithm is used to execute a pre-existing order in the most efficient manner, a situational algorithm seeks to take advantage of a particular situation.
The problem is that not all traders are given access to these BOTs. This has led to unfair trading tactics by those larger traders that do have access to them. The algorithms are constantly being updated to include new tricks and they can be executed at an ever increasing speed the latest being 200 microseconds (0.0002 of a second).
All knowledgeable traders and investors are mindful of the process but new retail (mum and dad) traders with restricted knowledge of the pitfall created by the BOT traders find it difficult protect their investment. They are easy prey to the BOT practitioners from the very start of their trading experience.
Also seasoned traders find that they cannot compete as either dont have access to or are unable to use similar BOT systems. They cannot compete with the BOT speed using a conventional computer system.
But the BOTs have also created a double edged sword. They fleece new traders/investors but at the same time are frightening away the life blood of the share market. It is the beginning of a self perpetuating disaster for Australian public owned companies. Just as the debt void resulted in the GFC this could be backed up by a future void of investors willing to share in public listed companies because it is an unsafe environment for their money. The companies will be left floundering for capital support and may be prey for larger financial institutions. Perhaps it is the start of the Company/Share Market Financial Crisis.
Smaller investors are especially being turned away or taken out from investing in public listed companies which are being targeted by the BOTS. This is especially so with companies that have a smaller capital base (small/micro caps) especially if they are in the development stage and are open to speculation.
The use of BOTS will eventually wipe out these smaller bread and butter shareholders that dont understand the market, but it is these same shareholders who are the foundation and future owners of the companies that make up the market. Admittedly, all shareholders must realise there are risks in investing in stocks and shares which is fine, but the added necessity to compete with BOTs is becoming unreasonable and unsustainable.
The BOT action can also see the share value of companies worn down to ridiculous levels and shareholders being left with unwarranted paper losses in relation to a companys fundamental worth. This is fine for long term holders of a stock, as the strong fundamentals should win out in the end (there are exceptions - please note the article about Dendreon I will mention later). It is the new buyers interested in the stock I am concerned about as they are sometimes relieved of their share, for no fundamental reason, when their stop losses and emotions are targeted by the manipulators. This makes it difficult for companies to gain the stability they needed to build their individual company. Australian investors are being hounded out of Australian companies. I dont think this is, primarily, the intent of the BOTs as they are just tools treating the ASX as a financial market but imbalance in the share of a company is increasingly becoming a consequence.
It is often the stronger stocks that are targeted because of the sound fundamentals which attract the buyers in the first place. The BOT manipulators feel relatively safe because of this.
Traders in the larger stocks are not exempt either. The use of BOTs means that some traders have an unfair advantage over others because of their ability to jump the queue and target buy and sell prices pre-determined by their algorithms.
The ASX has recently given its tacit approval to the future of BOT trading on the ASX.
Individual traders who are trying to trade on a daily, short term, long term, invest for the future or self manage their superannuation funds are being given access to the market through an ever increasing choice of on-line trading services. What they are not being given is equitable access to trading platforms made available to more sophisticated trading houses. The permission to use the fast and low cost BOT trades is only available via an expensive conditional license, issued by the ASX to a specific category of trader.
This is in the ASXs interest as the more liquid the stock market is the more revenue they collect from transaction fees. They also know that if the market is flooded with BOTs then the Exchange would self destruct. The BOTs need to have the upper hand to work, especially in manipulation. To manipulate there must be something or someone on which to vent the manipulation.
Originally BOTS were written to help traders to buy or sell large amounts of shares over a given time so as not to flood the market. Another way to do this is by off-market sale agreed to between the shareholder and the company at the closing price or VWAP on the day. Alternatively large numbers of shares were just placed on the market. There are times that sophisticated shareholders do not want to do this, so an algorithm is useful to them so they dont flood the market and cause chaos, thus decreasing the value of their own remaining shares on the way.
Traders soon found an alternative use for the BOTS, especially the so-called situational BOTs. They found the BOTS were useful to manipulate a stock to give them an advantage over other less sophisticated retail traders (mums and dads) and even smaller trading companies and brokers. There are a number of ways they can do this:
. In the pre-electronic days there might have been 4 or 5 buyers at a particular price, and if a seller came down to that level - then the trade was split. Since the advent of electronic trading, the first person in the queue had his order filled first. This seemed fair. However, with BOT trading, the BOT can get an advantage by jumping the queue by nanoseconds.
. At the opening and closing auctions (pre-open) a dummy buy or sell order can be placed to trick other traders into buying or selling into the pre-open price. This dummy order can be pulled at the very last moment to leave retail/on-line traders stranded without the ability to react before the close of the auction. The BOT can also manage the closing bid to keep the closing price at a pre-determined level. These are referred to as tick traders.
This ploy is useful to leave the price at a more desirable level to be published in the close of trade share price tables. It is also useful to jump over a buyer or seller in line to gain a favourable price.
. Very often the shares being traded are shorts (or the illegal practice of naked shorts), i.e. trading in borrowed securities (in the case of naked shorts not even borrowing those securities in the first place). This is with the intention of buying identical assets back at a later date to return to the lender.
So, a trader may borrow 10000 shares @ 50c each worth a total of $5000 and sells them immediately. The trader wants the price to go down so that he can pay less to buy them back and return to the original owner. If the price does go down to say 48c the 10000 shares will now cost him $4800 so he can return them after making $200 profit. If you multiply the number of shares borrowed and/or increase the loss margin, then you can see the short trader can make a great deal of profit. A trader can use BOTs to manipulate the share price to his favour.
. A trader may see the uncertainty in a stock and how some holders may not be sure about the stock no matter how sound the fundamentals of the company are. This is especially so in speculative stocks where emotions are raised by the fear and greed principle. These shareholders can easily be led into selling their shares in a panic when a large number of shares are being sold, giving the appearance of negative news.
Conversely, the opposite occurs when large numbers of shares are being bought giving the appearance that a positive announcement is about to be released, and the buyers at large follow.
A dummy price rise or fall instigated by BOTs may be all that is needed to infer a leaked announcement is about to be released. This is not helped by the regulatory bodies not appearing to be able to stem the amount of leaks and insider trading which always appears to be occurring in the financial markets. This uncertainty about the timing of information disclosure adds to the ability of BOT trading to add to the smoke and mirrors.
A trader will use whatever tactic they can, including BOTS, to ensure they can buy the shares back at a lower price to give back to the original owner. On the way they can accumulate extra shares triggered by stop losses Once they have paid back their borrowed shares they can then go long and force up the share price using the BOT tactics again, selling their extra accumulated shares from stop losses and panic. They will force the share price up again until a saturation point is reached and they borrow more shares to short and start the hole process again.
Because of the trading style that uses Technical Analysis, for example charts, the BOTS can look at predictable points they can target, without knowing anything about the company involved. These include such things as Fibonacci ratios, market trends, Elliot waves and a myriad of other charting tools. All traders use similar tools to reach uniform conclusions, and the BOTs are programmed to tap into this knowledge base.
I agree these trading styles are just a part of legitimate trading practices (apart from illegal naked shorts) and all traders should become aware of the tactics that are being used. This is just part of market trading. I would, however, just like to point out again that some traders have now been given an unfair advantage through their exclusive access to BOTS.
The stocks that are targeted usually have sound fundamentals but are in a holding pattern waiting for news that can be either negative or positive. The potential timing of an announcement is taken into account.
If it is positive a spike in the share price could be disastrous to short traders who have not managed to short out their borrowed shares but at the same time they may have accumulated sufficient shares to then go long and assist in pumping the stocks share price. Once a higher price is reached then he can borrow more shares at the higher price and use his advantage to run the share price back down with a new set of buyers to target. And so the cycle continues.
In the event of a negative announcement, he can make more of a profit from the short position he has taken. If he is long at the time of a negative announcement a BOT has the advantage of its calculation and transaction speed so he can jump the queue to minimise his losses.
All traders can take advantage of the swings that always happen in share market. The only thing is that anybody who has access to BOTS have an advantage. Unfortunately this only applies to the few. They are laughing all the way to the bank as it were, as they take dominance over the market. Other traders can only guess what the BOTS are up to and match their trades accordingly. But this can be an expensive business and adds, unfairly, to the speculation required by individual traders.
As an example I will use the stock Methanol Australia ASX:MEO.
This company has been in discussions with a major International Petrol and Energy Company since October 2009 regarding a farm-in opportunity to permit WA-360-P. MEO is acting as operator. This permit has been surveyed and has an estimated 12Tcf recoverable gas with a >32% geological chance of success. MEO own 70% of the permit and have two joint participating partners, CUE and MOG, who have 15% each.
One of the conditions of the discussions is that the identity of the farminee be kept confidential until the farm-in agreement is executed. The negotiations are still on-going and, regardless of the result, MEO have the ability to drill WA-360-P regardless.
MEO has a large retail base of shareholders which means the stock is open to volatility. These shareholders entered the stock at various price levels. Some were short term holders (not short traders) but many of them have now been tied into being long term because of the delays in the negotiations
In the mean time, consistent BOT attacks have reduced the share price of MEO (from 58c to 33c since the AGM Nov 15). Remember, short traders rely on the price going down. They want a downswing, the larger the better. Once they reach a certain level they push the price up again to restart the cycle. The new high point is usually at or below the previous high. This does not matter as the manipulators work on percentage margins and, provided these margins are within their target range, it does not matter what the actual share price is.
As this goes on the share price goes down and disillusioned shareholders are left with a loss, either real or on paper. Along with uncertainty about their investment, as the negotiations continue over time without resolution, short term retail shareholders may also need the money elsewhere. This means they have to sell at a loss making them easy prey for the BOTs.
This is a situation that is ideal for targeting by the manipulators. This certainly has been the case since October. The MEO chart has an array of ever decreasing peaks and troughs in a downward trend since the negotiations began. This is a natural progression whilst trading in a situation such as this but those using BOTs are at an advantage and without their aggression the share price may not have dropped so far. The reduction in volume is because retail traders have become more aware of the BOTs and it is presumed that the outcome of the negotiations must be imminent.
There have been a number of progress reports during this time with little more than a mention that talks are still on track. The most recent has noted that MEO and the farmin partner had agreed to the farm-in terms and all the original permit participants bar one had agreed to some side agreements. The undecided participant wants to negotiate the side agreements further.
So, in reality, the fundamentals of MEO have remained unaltered since their AGM in November but the manipulation of the stock, including BOT action, has persisted since then. This has resulted in lucrative swings for traders but has meant losses for unwary individual traders.
The most recent BOT action was on 31/03/2010. The BOT trader was trying to accumulate MEO at 33.5c. The tactic it uses is to push through continual small parcel sales of about 500 to 2000 shares as sells at 33.5c every couple of minutes. This created uncertainty amongst traders so they sold much larger parcels of MEO at 33.5c.
Waiting on the 33.5c buy side with big orders is the same BOT trader. If you look at all the BOT small parcel sells they only add up to be in the tens of thousands of shares, whilst the amount of shares being bought at 33.5c, presumably by the same BOT trader is far more than that, in the many hundred of thousands or possibly even millions. The manipulation is that the BOT trader sacrifices small parcels of sells (most likely to itself anyway) with the end game being able to pick up bigger parcels of 33.5c shares as people panic and get out.
If the BOT trader can push the price down to the next bracket (between 33.5 and 33c) it will continue to follow the above process accumulating more shares. This is the same tactic just at a new lower range.
The same tactic continued on 01/04/2010 where a similar action took place and more shares were accumulated at 33-33.5c until the sellers dried up. As of 06/04/2010 the BOT action had ceased so I presumed the share price would be allowed to rise, and even helped along by the BOT so the process can be repeated if the long awaited announcement regarding the outcome of the negotiations fails to eventuate.
On Wednesday 07/04/10 the BOT did indeed start working in the reverse on MEO. It bought up to 35c forcing the price up on the way. If this was an execution BOT used to offload a large amount of shares then it would have stopped at the lowest sell point. It start buying again so it must be a situational BOT as the weekly turnaround of sell/buy pump and dump tactics would nullify this off-load concept.
The situation it is taking advantage of must be the lack of an announcement caused by the long standing confidentiality agreement held between the negotiating parties. But the BOT is taking advantage of the situation by creating an artificial price for its own gain which is accumulation for profit making.
I notice also, that as the MEO shares are being forced up, the other two permit participants involved in the negotiations, CUE and MOG prices also rise. This would be purely to give the impression of a leak and an announcement is imminent. The trader who is using the BOT cannot lose because he has won from shorting MEO, given back the borrowed shares at a profit and any more that he accumulated on the way he can now stack the buying depth and sell into the rise using the BOT to his advantage, if necessary.
The reason I point this out is that exactly the same pattern emerged between the 17 and 29 March where the share price was pushed down from 37c to 32.5c (25/03), primarily through BOT action, and back up to 37c again only to be pushed back to 33c again by 1 April. This is on daily volumes of between 2-7 million shares on a 10% turn around.
And this is only a small swing compared to others that have been orchestrated over the last few months. But really the swing doesnt matter when trading large amount of shares, provided it is a always profit, no matter how large or small.
The lower the share price the larger the percentage profit, i.e. 34c-36c is a >5% profit. For a share with a starting value of 12c if it is manipulated 2c then that is a >15% profit. And the BOT operators are those who are moving large volumes of shares, therefore larger profits..
To help the illusion that the Share Price is going up or down the buy or sell side is stacked or false buy or sell orders are placed to create the illusion of depth of volume. The BOT traders, being well financed, are able to do this.
Another example is the change in the price of Ironclad Mining ASX:IFE on the 10th, 11th and 12th of March. On these dates respectively, a BOT accounted for approximately 66%, 75% and 72% of trades. All of the trades were for exceedingly small amounts, mostly $5 to $15 dollars, and well below those fees charged for "retail" brokerage on a trade.
This type of manipulation can be seen across the board, on a daily basis, amongst all stocks on the ASX.
A sound trading tool is to use a stop loss which is set if a stock starts to fall naturally through a change in fundamentals of the company either internally or through outside influences. Stops just above or below recent price ranges are common. The problem with such stops is that they are natural targets for BOTS that exploit asymmetries in buying and selling orders and tendencies. Unfortunately, most traders have never closely looked at the true value of their stops; they just take for granted that stops are needed and place them intuitively (and obviously).
The BOT knows that if it can get the price down to these lower levels artificially then the stop losses are triggered which helps the BOT along by creating panic.
The stop loss is set by retail traders who cannot keep an eye on the market constantly but, at the same time, are not able to keep an eye on the BOT action either. This action of the BOTS is harassing the small traders out of the chance to participate in the ownership of companies which was the intent of public listed companies in the first place.
Once the trader has manipulated enough investors to sell and accumulated sufficient shares, or if it has hit resistance where not many people are selling anymore, all the stop losses have been triggered and it has satisfied the need to return the borrowed shares if it is shorting, it will then start to manipulate the stock the other way to encourage buyers. After all, there is no point sitting there buying its own small parcel sells for too long. Having accumulated sufficient stock at low share prices it will push prices up with the BOT program where it has already stacked the sell side with big sells (starting just above its lowest buy and ranging up the sell price range).
With MEO I have noticed there is a cooling off period for couple of days, where the share price treads water at low volumes, until the BOT start its action again. The controlling trader will look at the stocks analysis to see whether or not to continue on with the stock or look for other targets.
As it starts to work the price the other way and buyers start to jump in following its lead. The BOT gets to sell all of its accumulated stock for profit on the way up at different ranges, starting at small profits but getting bigger as the SP increases. Once the rise in share price starts to falter the Trader with its BOT can start the process all over again and borrow shares again.
It can continue to do this up and/or down all day every day. The more fear or volatility in a stock the happier the BOT trader is as people will follow its lead.
This kind of trading manipulation, generally called walking the price has gone on manually since Share Markets began but this was an even playing field amongst traders who had equal resources to call upon.
This has changed since the eventuality of BOT trading. BOTS can only be used by certain traders who register with the ASX and are charged high establishment fees. The BOT traders also have negligible trading fees (51c per trade). This is compared to the ordinary retail trader, especially on-line sole traders, who are not allowed to use trading software even if they apply. They are charged a much higher trade fee ($20-$40 per trade) and are limited to the size of their trades which is usually greater than $500 (about 1500 MEO shares @34c).
If this inequality is allowed to continue the market will deteriorate and its capital framework will disintegrate as the BOTS will take control and will be selling to themselves endlessly. This will eventually affect the ability of public listed companies to function as was the original intent.
Of course, overuse will eventually make BOT trading redundant in any case, unless the software writers include failsafe measures in the BOT code. This is quite plausible but whatever the case I feel but untold damage will be done in the mean time both to shareholders and the companies they own.
How to prove this.
There is an easy way to prove or disprove this manipulation of share price. All it needs is access to the records of who is buying and selling shares and check the following:
1. Confirm which trader is selling the small parcels of stock using the BOT program (in the case of MEO, small parcels of shares at 33.5c).
2. Confirm whether or not the same trader is the one actually buying larger parcels of shares at the same price of 33.5c. These are the larger parcels being sold by uneducated investors out of fear, due to manipulation by the trader running the BOT program. These shares are being accumulated by the BOT trader at a much faster rate than the relatively small quantity of sells it is placing. These larger quantities of shares may be being placed back on the market almost in real time at a higher sell price to stack the sell side adding to the depth.
3. Once a push for a rise is put in motion a check must be made if it is the same trader who withdraws the sell orders and stacks the buy side to pump the stock and give the appearance that the stock is in favour again. He may also be using the BOT again in reverse mode.
4. Once the BOT action is confirmed, determine whether or not the trades were legitimate in the sprit of how BOT trading was implemented in the first place. An example could be the off-loading a large number of shares by an institutional trader.
Non-legitimate reasons would include such things as artificially manipulating a share price for profit and other such actions contravening the various Acts and Regulations which make them illegal.
Of course this can only be proved by the ASX and regulatory bodies who have access to the details of the trades and participating traders. Individual traders can only look at the patterns repeating on a number of stocks on a daily basis
Reasons why BOT manipulation should be banned.
I would like to draw your attention to the following Acts which were drawn up to address this type of practice:
1. - "Corporations Act 2001" Section 1041A
Chapter 7 Financial services and markets
Part 7.10 Market misconduct and other prohibited conduct relating to financial products and financial services
Division 2 The prohibited conduct (other than insider trading prohibitions)
Section 1041A
484 Corporations Act 2001
Division 2The prohibited conduct (other than insider trading prohibitions) 1041A Market manipulation A person must not take part in, or carry out (whether directly or indirectly and whether in this jurisdiction or elsewhere): (a) a transaction that has or is likely to have; or (b) 2 or more transactions that have or are likely to have; the effect of: (c) creating an artificial price for trading in financial products on a financial market operated in this jurisdiction; or (d) maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction
2. - CORPORATIONS ACT 2001 - SECT 1041C False trading and market rigging--artificially maintaining etc. trading price
(1) A person must not (whether in this jurisdiction or elsewhere) enter into, or engage in, a fictitious or artificial transaction or device if that transaction or device results in:
(a) the price for trading in financial products on a financial market operated in this jurisdiction being maintained, inflated or depressed; or
(b) fluctuations in the price for trading in financial products on a financial market operated in this jurisdiction.
Note 1: Failure to comply with this subsection is an offence (see subsection 1311(1)). For defences to a prosecution based on this subsection, see Division 4.
Note 2: This subsection is also a civil penalty provision (see section 1317E). For relief from liability to a civil penalty relating to this subsection, see Division 4 and section 1317S.
3 - I would also like to draw your attention to the ASX website where it states:
Algorithmic trading.
Many retail investors find algorithmic trading unusual because it can generate a lot of trades for very small numbers of shares. ASX closely monitors algorithmic trading patterns as it does for all trading activity - and while the level of algorithmic trading has increased in recent years, it has not raised major issues for ASX. When ASX does uncover evidence of manipulative trading behaviour, however generated, a referral is made to ASIC, the regulator.
To better understand the effects of algorithmic trading, it is useful to understand what algorithms are seeking to achieve.
Execution algorithms were developed to minimise the market impact of large orders and therefore reduce the costs of trading. The most common of these is VWAP an algorithm designed to ensure that the execution of a large order is done at the volume weighted average price of a security over a day.
Situational algorithms are more sophisticated algorithms, which seek to profit from changes in data, information and events. Whereas an execution algorithm is used to execute a pre-existing order in the most efficient manner, a situational algorithm seeks to take advantage of a particular situation hence the name. It will create orders from a computer-generated algorithmic strategy as well as execute the orders as efficiently as possible.
If situational algorithms seek to profit from changes in data, information and events, doesnt this admit that individual traders are at a disadvantage when the same profit making tools are not available to them and enable fair competition?
Is the situational algorithm seeking to take advantage of other less well equipped traders who are in the same situation?
To continue, elsewhere on the ASX site it states:
Market manipulation:
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a stock. This is typically done either by spreading false or misleading information in order to influence others to trade in a particular way, or by using buying and selling orders deliberately to affect prices or turnover, in order to create an opportunity for profit.
Examples of market manipulation for which ASX Markets Supervision monitors include:
Price manipulation:
Placing buy or sell orders (or both) into the market in order to change or maintain the price of a stock. The motives for attempting to do this vary: * To increase the value of a position in the stock for accounting or portfolio valuation purposes; * To be able to issue new shares at a higher price; or * To cause such a price rise that other investors are attracted to the stock, creating additional demand and higher prices that the manipulator can sell into.
These two statements are contradictory, especially when taking into account the evidence of price manipulation by the use of BOTS I have presented in this document.
In addition, if only a certain elite minority of the trading fraternity is given permission or is able to the use algorithmic trading BOTS, then equality and fair trading of shares in a company is lost.
It must also be noted that Chi-X Global Inc, an electronic trading platform backed by financial institutions including Goldman Sachs Group Inc, have gained preliminary government approval to open Australias first rival to the sole Australian stock-exchange operator ASX.
To add to the ASXs ambiguity in their statements they have also added commentary on this move with a statement included in a story written by Shani Raja and Marion Rae: - and published by Bloomberg here.
The government must ensure regulations are in place to ensure the interests of issuers of capital and long-term and retail investors are not compromised to the primary benefit of the high-frequency trading community, ASX spokesman Matthew Gibbs said in an e-mail today.
And this in the same story:
Exchanges worldwide have been building faster systems in response to rising competition from alternative trading platforms that allow fund managers to trade anonymously with lower transaction costs. ASX said last month it will install a new trading system later this year that will slash transaction times and allow more trades to be processed.
Chi-X was the first so-called multilateral trading facility to challenge traditional bourses, including Deutsche Boerse AG, London Stock Exchange Group Plc and NYSE Euronext, by offering lower fees and faster trading.
We often see price queries or please explain memos from the ASX to companies when their share price rises more than 12% for no apparent reason. Duty of disclosure deems that these all relative material is released to the market.
I have yet to see a BST issued for investigation published. I know plenty of BSTs have been issued by concerned traders but the lack of publicity about them must mean they have either never been proven or not made public if they have. Does this show a lack of transparency by the ASX/ASIC?
Quite a number of the sudden rises in share price that lead to a price query do have associated BOT trades. Surely the ASX must see a connection? Or would an investigation into BOT trading affect them financially?
Whilst I agree with the ASX spokesman Matthew Gibbs regarding the interests of long term investors my questions are:
. Will The ASX look more closely at the impact of BOT trading and their impact on retail traders immediately?
and
. Will these lower fees and faster trading platforms be made equally available to all traders, large or small, sophisticated or individual?
The proof is there at the moment that this equilibrium is not being achieved in the present ASX monopoly system. It needs to be addressed quickly before or at the same time new Exchanges are allowed into Australia.
Further Evidence.
An ever growing number of people have voiced their concerns by issuing the ASX with BOT Speeding Ticket (BST) and sending copies to the ASIC. It is estimated that about 60% to 70% of all complaints to the ASX and ASIC related to the use of BOTS.
This fact can be seen on internet chat forums such as Hot Copper where active discussion about BOTS can be seen amongst seasoned traders who are witnessing and reporting the growing problems of BOTS first hand. Parts of this document are extracts from what has been posted by those Hot Copper members.
Also, to support the claims in this document I would like to draw your attention to a sample of observations on the subject as published in media reports:
Citigroup is also making changes to ColorBook, the smart router from Lava Trading, ColorBook currently executes orders in 700 microseconds, or 0.0007 second, Swanson said. The firm is trying to reduce that to 200 microseconds.
# How can a retail trader using a PC compete with these systems?
2 - Stock Traders Find Speed Pays, in Milliseconds
By Charles Duhigg NY Times - Published: July 23, 2009
It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors orders and, critics say, even subtly manipulate share prices
... Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.
This is where all the money is getting made, said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. If an individual investor doesnt have the means to keep up, theyre at a huge disadvantage.
3 - There's millions in those milliseconds
By John Daly The Globe and Mail (Canada) - Published on Wednesday, Jan. 27, 2010.
On any given day, electronic upstart Infinium may trade more shares of TSX heavyweights than any of the big-bank investment dealers. Is this creative disruption of market traditionor just plain destruction?
"Look," says Sergei Tchetvertnykh, pointing at a flashing spreadsheet on his desktop's screen. "I just made $82,000 in one second."
The co-CEO of the Toronto-based electronic trading firm Infinium Group isnt exaggerating. A second is now a very long time in financial markets, thanks to computer algorithms. Traders can gather and interpret market data, and buy or sell securities in response, in milliseconds (thousandths of a second) or even microseconds (millionths of a second)..
.. On a typical day, Infinium, with offices in Toronto, San Francisco, London and Barbados, executes between 500,000 and one million trades of stocks, options, currencies and other financial instruments worldwide. Measured by volume of shares, it is often the largest single trader of major companies listed on the Toronto Stock Exchangemore active, in other words, than any of the otherwise dominant investment dealers owned by Canadas Big Five banks.
The paradox is that Infinium is still very small and very young
4 - Michael Milken, 6000 Deaths and the Story of Dendreon.
Posted on deepcapture.com by Mark Mitchell, 15 September 2009 regarding naked shorts and how they decimated the company Dendreon and their prostrate cancer drug Provenge. It is a very long story.
The way good companies can be sent to the wall can be witnessed by what happened to Dendreon in the US. 60000 deaths can be attributed to market manipulation.
5 - SEC plans to ban flash trading - will dark pools be next?
Chalk this one up to the power of the blogosphere. Sen. Charles Schumer of New York stated today that he had received a personal guarantee from Mary Schapiro, head of the Securities and Exchange Commission, that a ban on "flash trading" was in the offing, according to Bloomberg News. The practice had allowed stock exchanges and specialized trading shops to sell advanced-notice of stock orders, providing customers with an extra split-second to trade before pending stock orders.
Critics charge that flash trading allowed sophisticated Wall Street players -- Goldman Sachs (GS), Credit Suisse (CS) -- to pocket billions of risk-free profits through computer algorithms that probe flash orders to determine actual prices that buyers and sellers are willing to pay, and then instantly pushing the actual market price to those levels. A number of leading financial blogs, including ZeroHedge, had been agitating for an end to the practice since early this year.
Conclusion.
Included the above Bloomberg article (dated 31/03/10 here) about the introduction of Chi-X Global Inc as an alternative trading platform is a statement by Financial Services Minister Chris Bowen
This means therell be more than one stock exchange in Australia fighting for the business of Australias investors,
.. The introduction of competition will be a significant change in Australias market structure.
Competition between financial-market operators is a vital step in the development of Australia as a financial hub, he said.
Market participants will require a lead time to adapt and supervisory and regulatory arrangements will be established and communicated to the market before competition is introduced, Bowen said, without giving a timeframe. Other applications for market licenses will be considered.
Being only a humble retail investor I am not sure what solution will be found. I, along with many other investors, can only see the problem. We dont have the authority to act apart from writing to the powers that be that have the ability to put right the irregularities creeping into the Australian Financial Markets.
It is a matter of great importance.
With the impending change to the framework of the Australian Financial Market it is imperative that the supervisory and regulatory arrangements are debated clearly in the Australian Parliament by our lawmakers and open for public comment.
I believe existing regulations should be reviewed to ensure present inconsistencies caused by the increasing use of BOT trading should be reviewed immediately to ensure they are protecting the rights of all market traders in an ever changing trading environment.
Once set in place these regulations should be transparent, open to revision and not able to be manipulated themselves.
This is imperative to ensure that the integrity of the Public Listed Company ownership system is kept intact and not undermined by a trading system that is based solely on financial gain, available to only a minority of traders, to the detriment of other shareholders.
It must also make clear that any future trading system(s) must be equitable to all traders. This is what the very fabric of Australias fair trading principles are based.
I believe that this commentary and any other similar correspondence directed at the regulatory bodies and their peers will support this recommendation.
I have attached an example of a BST that is being sent to the ASX and ASIC.
I have also attached a standard reply from the ASIC that is being sent to traders referring this problem. In their reply they state:
While ASIC may advise the Australian Government on matters concerning the regulation of Australia's capital markets, it is not a law reform body.
As such, to the extent that you feel that ASIC should enact legislative reforms in relation to algorithmic trading, we advise that this is a function carried out by the Australian Government and Treasury. For contacts details and further information regarding the functions of Treasury, please visit www.treasury.gov.au. You may also wish to make a representation to your local member of parliament in relation to any suggested law reform.
As I feel this matter should be drawn to the attention of all MPs and Senators who, I hope, will be debating the supervisory and regulatory arrangements before the introduction of the new exchange and associated reforms I am making representation to all Sitting Members, Senators and the Treasury.
