by Jonathan ShapiroHigh frequency traders are becoming more sophisticated and aggressive and have increased gross revenues while trading more “mid-tier” securities.A report released on Monday by the Australian Securities and Investment Commission estimates that high frequency trading firms earned revenues of between $110 million and $180 million in the 12 months to March 2015, a “material” cost of around one basis point to users. But that estimate is just a fraction of $1.2 billion to $3 billion costs cited separately by Industry Super Network and Senator Jacqui Lambie who has called for a tax on traders.

Independent trading expert David Stocken said the report “dispels the myth” that HFT is generating abnormal super profits in Australia. He said Industry Super Network $1.6 billion to $1.9 billion estimate on the costs was a “wild exaggeration”, and conducted research on the profitability by using trading data.

“We would concur that the ASIC cited band of $110 to $180 million for HFT gross revenue in Australia is a very credible estimation.”

Mr Stocken said ASIC’s estimates would aid “a level headed debate about the merits or otherwise of HFT in Australia without that debate being centred around wildly exaggerated HFT profitability estimates”.

ASIC’s estimate puts the cost imposed by HFT firms on the broader market at 70¢ to $1.10 per $10,000 dollars of trading.

MODEST

ASIC senior specialist Joe Barbara said that while the cost was ‘material’, it was also modest “compared to trading fees clearing fees and the cost of brokerage.

“When you look at the cost of HFT intermediation in comparison to our estimate to the cost of liquidity which seems to be 9 basis points, it doesn’t appear excessive.”

Mr Barbara said the “break-even” point for HFT revenues to be deemed excessive was around $400 million when compared “to the cost of sourcing liquidity directly from the market”.

The report said that the use of dark pools had remained constant accounting for about 25 to 30 per cent of all activity – but was diverting back to its original intention – for large block trades.

While ASIC said that most of the initial concerns about dark pools had abated it was still worried that some exchange users had sought to preference some users over others and harboured doubts about how conflicts of interest between clients and in-house trading units were managed.

SHIFT TO FUTURES

High frequency traders are moving more trading to bond and equity futures markets, according to the latest report.

ASIC figures show that the level of HFT in equity markets remained steady at 27 per cent of turnover but trading in futures markets had more than doubled since December 2013 with HFT accounting for 14 per cent of turnover in the SPI equity futures market and 14 per cent in bond futures.

ASIC said that while these levels were not currently concerning, it would continue to monitor their developments.

The ASIC review into high-speed trading and “dark liquidity” where trading takes place away from the public exchanges said that financial market users were adapting to markets populated by machine traders.

The report concludes that their rise was not “adversely affecting the function of Australian markets for businesses and investors”.

Stocken, who has published research on dark pools and high frequency trading in Australia, said ASIC’s reforms around HFT and dark pools had largely been “adequate and effective”.

“But the market is ever evolving at a fast rate of change. So it is also reassuring to know that ASIC is remaining vigilant in their commitment to conducting ongoing monitoring of HFT and dark liquidity,” Mr Stocken said.