hft; what are the facts?, page-19

A little transparency would go a long way

smh.com.au
December 14, 2012
Adele Ferguson
Business columnist

THE veil of secrecy on the identity of buyers and sellers trading on the sharemarket has become the subject of scrutiny seven years after broker identification was nuked by the Australian Securities Exchange.

ASIC is believed to be looking at the issue of broker identification, including identifiers for clients, not just brokers. In a multi-market environment, a whole-of-market regulator will need to decide on this rather than the ASX.

ASIC was unavailable for comment.

It comes as the debate on dark pools and the impact of high-frequency trading and algorithmic trading on the integrity of the sharemarket has become the topic de jour of the government, the corporate regulator, a cabal of fund managers and industry super funds. It prompted one broker to describe the sharemarket as a casino. It is little surprise given the poor returns of super funds from investing in the equities market, the low volumes and rising concerns that the sharemarket no longer operates in a ''fair, open and transparent'' manner.

Advertisement It is a topic that has been put through the mixer by ASX chief Elmer Funke Kupper who has been lobbying ferociously about dark pools and high-frequency trading as part of his pitch as to why it is important to retain the status quo in terms of allowing the ASX to keep its clearing and settlement monopoly.

In June last year, one of the world's biggest clearing houses, LCH Clearnet, applied to ASIC for an alternative clearing-system licence. ASIC and the Reserve Bank are finalising recommendations on whether it should be opened up to global competitors. But final approval rests with the Treasurer Wayne Swan.

The application to bust open its clearing monopoly comes after Chi-X was granted a licence to set up an alternative trading exchange in competition with the ASX, with some arguing this increased the size of the high-frequency trading market and dark pools.

ASX has argued against a second clearing system on the basis that ''any change to the structure of clearing and settlement will increase operational risk'', it wrote in a paper to ASIC.

But in the various talks it has had with market participants the issue of broker identification has come up and has received a rallying call from retail brokers who have felt that over the past decade the ASX has largely overlooked their needs in favour of the needs of their big-fee-paying foreign investment bank counterparts.

In one broker's words: ''Those same big market participants - some of the big investment banks - that the ASX has favoured are now trying to slit the ASX's throat by bypassing them through dark pools, using Chi-X and supporting LCH's push for a licence. The ASX deserves what it gets.''

There is a certain irony about the ASX warning about high-frequency trading and dark pools given it arguably has oversight - and created - one of the biggest dark pools in the country. By masking broker IDs in 2005 nobody knows who the buyer or seller is for T+3 days. This means nobody knows who they are buying or selling from, which is the ultimate lack of transparency.

Before the ASX got rid of broker IDs, each market participant had an identification number that tracked its trading in all the companies listed on the ASX. This allowed every trader with a SEATS (Stock Exchange Automated Trading System) screen to immediately know which broker was trading which stock, including the price and the volume.

The argument at the time to support the removal of broker IDs was that the big broking firms felt they were at a disadvantage when trading because it encouraged front running. The ASX accepted these arguments as well as the belief anonymous trading would improve liquidity and price discovery. The theory was if nobody knew who was behind the trades it would inspire companies and investors to trade more.

But since it removed broker numbers from the trading screen, it took away what many traders and investors considered an important piece of information in trying to predict where share prices might go. It can be argued that it spawned the quest for less and less transparency.

In a world of hedge funds who go in and out of stocks, along with high-speed trading, where technology allows trading in shares almost at the speed of light, this argument has become less relevant.

In December 2005, Rob Cameron, who at the time was working at Cameron Stockbrokers, wrote a scathing yet prescient letter about the removal of broker IDs. ''The exclusion of brokers' IDs on the trading screen seems to tilt the playing field against the brokers who are accustomed to dealing in small to mid-cap stocks. The sometimes irrational operating of online traders and computer-generated sales is confusing enough without attaching a blindfold to what is genuinely going on with the trade in a particular company's stock … Let's move to a fully informed and transparent market, with broker identification available to all.''

Any move that improves transparency can only be a good thing. With a rise in short-term investments, the factors that push shares up and down on a daily basis have become less related to the company and more to gambling.

Let's hope that out of the debate sanity will prevail and regulators and the government will give investors some transparency back and companies some faith in the longevity and intentions of their investors.