Concerns have been raised that Asian stock exchanges are set to follow Australia's example by imposing market surveillance charges on high frequency traders, a pseudo tax that could hamper innovation and competition.
Jessica Morrison, head of Asia-Pacific market structure at Deutsche Bank, told a forum in Hong Kong this week that the so-called fee-recovery model of the Australian Securities and Investments Commission (Asic) was self-defeating.
Asic has declared that market supervision costs totalling A$26.5 million ($26 million) from January 1 this year to June 30 next will to be split between operators and participants. Yet the latter bear 86% of the cost, while operators ASX and Chi-X have just 14%.
“No one would dispute that the regulator needs to be paid for doing their job, but is it fair to direct such [market surveillance to] a narrow proportion of the market? The whole point of competition is reduction of cost and innovation. If you make it so expensive to operate in that market, it almost drives those benefits away,” warns Morrison.
It's worth pointing out that in its February 2010 review, ASX estimated that trades executed via algorithms accounted for 30-40% of cash equity turnover; while HFT, a subset of algorithmic trading, accounted for just 3-4%.
One feature of Asic's surveillance charge is that it is charged on participants based on the number of messages they send to the exchange. Given the huge number of orders sent by high frequency traders -- the bulk of which are cancellation orders -- this has raised concerns that regulators are using such charging as a tool to curb high frequency trading in the first place.
Morrison believes Australia is the first jurisdiction in Asia-Pacific to propose a fee-charging system based on message volume, an idea she notes was first mooted by the International Organisation of Securities Commission (Iosco). There is concern that other regulators might follow suit.
“It is clear that regulators have been following Iosco…whose standards will filter down to Asia-Pacific,” she notes.
The growth of HFT in Asia is evident when you examine SGX, where 33% of listed equity futures are traded using such strategies today, from just 5% in 2007, according to Sutat Chew, executive vice-president and head of sales and clients at SGX.
Last year roughly 28% of total market turnover in listed warrants traded in Hong Kong was via high frequency. Ashley Alder, chief executive of the Securities and Futures Commission, has said regulators in Hong Kong and elsewhere are still debating whether HFT genuinely promotes market liquidity, or brings distortion to price formation.
Shamu Thambi, executive director of institutional equity division of Morgan Stanley, argues that costs charged on HFT participants should be determined as a function of the exchange’s capacity to deal with that order flow.
“In an ideal world, an exchange and regulator would be able to deal with an infinite amount of message flow…but considering the platform that they have, they might need to curtail that [message flow] to ensure they have a reliable matching platform,” Thambi says.
Rather than blanket rules from regulators to curb HFT, it is the exchanges themselves who should decide whether that flow is valuable to the market. The costs associated with engaging that flow should determine how they charge participants, he argues.