Rather than trying to hinder the high-frequency traders by taxing the buy and sell orders they place and withdraw in milliseconds every day, the Industry Super Network proposes a new trading model with a series of auctions through the day that would clear all available orders at the one price.
Zak May, director of regulatory policy at ISN, said the call-auction proposal would bring buyers and sellers together in a co-ordinated way, resulting in reduced volatility, improved price discovery, and protection against the increasing practice of high-frequency trading. It would also make the market more resilient in the face of liquidity crashes and systemic risk, according to a proposal put to a federal Treasury review of market integrity rules.
It would concentrate liquidity by aggregating orders over a period of time and executing them together "at the call". The auction would clear at a single price, at which the maximum number of shares would be exchanged.
"By bringing together all buy and sell orders coming in over a period of time into a single process, call auctions would create deeper pools of supply and demand," May said.
Industry funds have been vocal critics of the rise of high-frequency traders that are estimated to account for 25-30 per cent of turnover in the market and have driven institutional investors and fund managers to increasingly use dark trading venues where they can trade among themselves.
"In a call auction, the importance of excessive speed, and the advantages of high-frequency traders is reduced," May said.
"All orders would go into the same auction and would not be executed until the auction is called, providing long-term and retail investors with a more level playing field relative to high speed traders.
"In addition, our proposal includes a recommendation to randomise the duration of the auction and seal the bids into the auction, which would constrain the ability of certain market participants to get access to and act on information ahead of others."
May, a former official with the US Securities Exchange Commission, said the proposal could be a "silver bullet" for many of the market's issues because by reducing the number of orders in the market it would also reduce regulatory burden on the Australian Securities & Investments Commission and the costs it needed to recover from the market.
