I thought the following article reported by Fairfax this morning...

I thought the following article reported by Fairfax this morning may interest many of you:


ASX points finger at machine traders
MICHAEL EVANS
February 9, 2010

THE Australian Securities Exchange has used a submission to the Australian Securities and Investments Commission on controversial computer-driven algorithmic trading to warn of threats to market integrity should it lose its market monopoly to foreign operators.

The ASX, which acts as market supervisor as well as profiting from each trade on the sharemarket, found there was little evidence of market manipulation from algorithmic and high-frequency trading. But it confirmed to BusinessDay that its review of the contentious trading practice was confined to just one area of the rapidly growing market - equities - and did not include the highly lucrative and controversial derivatives and commodities markets.

Programmed trading has come under intense scrutiny around the world over the past year as the battle between man and machine has seen shareholders struggle to compete with million-dollar computer programs that can trade in milliseconds.

The review comes ahead of the monopoly market operator being stripped of its market supervisory powers in favour of ASIC later this year and ahead of an expected dropping of restrictions on foreign exchanges setting up in competition to the ASX.

ASX argued that an open regulatory regime allowing competition would ''generate implications for brokers and for less sophisticated investors''.

''It also has profound implications for supervisors and market operators in terms of seeking to preserve market and operational integrity, and it raises some important public policy issues about balancing the interests of short-term traders with those of long-term investors,'' ASX said.

''A small number of trading algorithms in use internationally employ strategies that, if they became widely used in Australia, would raise questions about their impact on the supervision of the local equity market and on non-algorithmic market users, particularly retail investors.''

The proportion of complaints relating to algorithmic trading has increased from about 10 per cent of complaints directed to ASX Surveillance in early 2009 to about 30 per cent by the third quarter.

The review identified a fourfold increase last year in potentially illegal ''wash trades'', which occur when a trader places a buy order against a sell order for the same beneficial owner. They are often employed by high-frequency traders to flush out liquidity in a stock, being bid and then withdrawn so quickly that other traders do not have time to trade.

In January 2009, 11,000 trades were cancelled; by August the figure was 43,000.