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Date: May 02 2012
In the ASX's Sydney data room, fat fibre-optic cables feed on the exchange's server system like white maggots. The ASX system processes all buy and sell orders and carry data at 299.8 million metres a second: the speed of light. ''Flash'' or ''high frequency traders'' pay the ASX a high fee for these parasites.
Already they probably execute most of the ASX's trades. In the United States, HFT was worth $US129 billion in 2009 when it comprised 70 per cent of all stockmarket transactions.
It's said that the algorithmic-programmed computers used by these traders pick up patterns that signal a large order is about to be placed. This allows them to ''front run'' the coming order, thus raising the buying price infinitesimally. These operators start the trading day owning no shares and end the day owning no shares.
It seems computer driven algorithmic trading untouched by human hands is taking over from retail investors who are deserting stockmarkets in their millions worldwide.
Are these flash traders front running their competitors? Front running is a type of insider trading that involves buying a stock before recommending it.
Famous stockbroker, the late Rene Rivkin, went to jail for such trading and later committed suicide. Does his crime differ from the activities of these high frequency traders?
How can an algorithmic-programmed computer anticipate the future? The US group Butler Research LLC explains it this way: Flash or high frequency trading uses advanced hardware and software so powerful it can move prices in a split second with little actual trading.
These programs suddenly flash great numbers of contracts for sale but before much selling occurs other traders see these great volumes of contracts offered for sale and cancel their buy orders and start entering their own sell orders to get ahead of the huge numbers of HFT selling trades offered.
But most of the time only a few of the HFT selling orders get actually traded because they are quickly cancelled.
The trade knows this as ''spoofing!''. The selling orders are never intended to be filled. Their aim is to scare others into selling. Having spoofed the competition the HFT traders buy. It's all done in a split second but allows the spoofers to make say, one 10th of one cent profit on millions of trades.
It's argued that this does no harm, as retail investors can't be bothered about making or losing a minute percentage of a cent per share.
It's also argued that HFT creates extra volume and its liquidity keeps stockmarkets alive. No liquidity, no trades!
A transaction tax would eliminate HFT transactions but unfortunately stock exchanges are already dependent on flash trading for their profitability.
Thus worldwide retail investors are voting with their feet, as the stockmarket's main function is no longer raising capital to fund productive businesses but making money out of money, with HFT the latest innovation.
In addition, Australian retail investors suffer from a native form of financial apartheid. The Corporations Act grants special privileges to ''wholesale'' investors if they have a gross income of more than $250,000 a year or net assets of at least $2.5 million. This allows them to participate in special discounted share issues from which retail investors are excluded because they are vulnerable ''non-professionals!''.
Such hypocrisy seems at variance with the British common law principle that all shareholders should be treated equally?
Financial commentator Terry McCrann described this Act as ''theft'' approved of by the Federal Government's Australian Securities and Investments Commission (ASIC).
For example, recently Global Metals Exploration (ASX code: GXN) announced a gold discovery that sent its price up 8.33 per cent. Management then applied for a trading halt to make such a discriminatory share issue.
When trading resumed the discounted shares hit the market and existing retail shareholders lost all the 8.33 per cent gold find gain.
Is that theft?
■ Follow me on Twitter @BillHarcourt or email me wharcour@bigpond.net.au
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