Photo: High-frequency trading accounts for up to 70 per cent of trades in the United States. (Brendan McDermid,file photo: Reuters)
Related Story: High-frequency trading a 'systemic risk'
Map: Australia It has been called the rise of the machines - automated share market trading which allows some investors to make quick profits but also makes volatility worse.
Algorithmic or automated trading is under the spotlight particularly in the United States.
Earlier in the year investment firm Knight Capital almost went under because of a trading glitch, and in 2010 there was a flash crash on Wall Street where the major share indices tumbled dramatically before rebounding minutes later.
Now the Federal Government is tightening up the share market rules in Australia to address the issue.
"We want to make sure that there's a level playing field, in terms of regulation, for all users engaging in trading of shares," said Financial Services and Superannuation Minister Bill Shorten.
"What we have seen in recent times, and in America even more so than in Australia, is that it is possible using algorithmic trading programs for large volumes of trades to go through at a very fast rate, this is called high-frequency trading.
"High-frequency trading, at the moment, constitutes about 25 per cent of the trading volume of the ASX and around 50 per cent of Chi-X, but in America it's up to 70 per cent."
The new regulations put in place trading rules to stop big swings in the market.
Dark pools - secretive private markets used by some big investors to make trades in secret away from the transparency of the main markets - will have to be more open about pricing.
Mr Shorten says there will also be automatic kill switches in place by 2014 to stop a computer program that has gone haywire.
"There'll be an automatic control which will cut off connections to exchanges," he said.
"So what'll happen is that brokers will have an automatic control which will cut off connections for exchanges for out-of-control algorithmic trading."
Mr Shorten says many traders already have kill switches in place but the delay in implementation allows others to catch up.
"The very fact that we've announced where we want to end up will create incentives for others to move to that sooner than that," he said.
Hysteria
The Stockbrokers Association has welcomed the changes.
"There are no big surprises or sudden shifts in what they've been proposing anyway, and I think ASIC [the Australian Securities and Investments Commission] and the Minister have taken a softly, softly approach on some of the problems we've seen in the marketplace," said David Horsfield, the chief executive of the association.
"I think there's a lot of hysteria around high frequency trading and dark pools. I don't believe the problem's been solved, but it's the first step being done and I think it's a sensible approach."
Carole Comerton-Forde, a professor of finance at the Australian National University, says the changes tackle the problems caused by new technology and rapid developments on global financial markets.
"So the new change is the requirement for meaningful price improvement, and what that means is that in order to do one of those trades in the dark, they have to be done at a price which is better than what's currently being displayed on one of the exchanges," she said.
Tougher reforms
But some want to see tougher reforms to further protect small investors and super funds.
Zak May is from the Industry Super Network, which represents the not-for-profit superannuation industry.
"While they go some way to addressing the major concerns with high-frequency trading, by imposing a kill switches and preventing extreme price movements, they reduce the likelihood of a major crash on the market caused by algorithms going haywire, but what they don't do is they don't restore fundamental fairness to the marketplace," he said.
The Industry Super Network wants to see a moratorium on high-frequency trading.
Mr Shorten says the Government may consider that after the corporate regulator hands down its report from two taskforces in March.
"That'll be one of the propositions advanced, but I'd also just caution [that] not all high-frequency trading is bad," he said.
"It's inevitable with advances in technology that Australian markets will want to have the benefit of the best innovation and technology, but we need to make sure it's done in a way which is efficient and equitable, not unfettered and then we hit some sort of big problem down the track."
