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High Frequency Trading

Australia is now getting what many parts of the world are already doing – high frequency trading. What does this mean for the ASX marketplace and how might it affect the way you trade?

High Frequency Trading in Australia

High frequency trading (HFT) is a new type of trading taking the world by storm. It involves using computer algorithms and programs to make automated trades in the market. A typical HFT lasts a very short period of time which can be counted in the micro- or milliseconds. Hundreds or even thousands of small trades add up over a day to create profit. Estimates vary but some see the volume traded by high-frequency trades as making up 50 – 80% of the market.

Of course, to be competitive with this type of trading you would need incredibly low trading fees and low-latency data. If costs per transaction were high or there was a big delay between when you hit the buy button and when shares were actually purchased, this would render this strategy impotent.

This is where Chi-X and PureMatch come into play.

ASX Trading Platform: PureMatch

On November 28th, ASX launched a new platform called PureMatch. It debuted with only 10 shares to trade, but this will be expanded up to 200 by December 12th 2011. The most important features that you should be aware of are price and speed.

Orders will cost 0.15 bps (basis points). If you use limit orders (or resting orders) and trade frequently, this can be reduced to 0.05 bps. This allows for a wide variety of trading strategies that profit from very tiny market movements.

CHI-X Trading Platform

Chi-X Australia is owned by Chi-X Global with reaches in Japan, Canada, and Europe. The PureMatch and Chi-X platforms will be similar in that both will have low cost and fast transaction speeds. The current fee structure is 0.06 for passive orders (limit orders) and 0.12 for aggressive orders (market orders).

The prices are slightly cheaper through Chi-X.

What This Means For You

What does this mean for you?

For some it will open a whole new way to trade. Algorithmic trading has been around for quite a few years as computers can execute buy and sell orders faster than a human. With low-latency trading and low-cost fees, expect to see the rise of high frequency trading. Expect to see a slew of proprietary trading firms open up in Australia or even trading arcades. These are firms that allow you to trade using the firm’s capital and software or your own with aggressive scalping techniques that were not possible under higher fee structures.

High frequency trading usually tightens up the bid-offer spreads making more liquidity available to the market. Fierce competition to be the trading execution venue of choice has already resulted in lower transaction costs and you can expect it to continue to do so. Many platforms offer rebates when making passive or limit order trades. If this happens in Australia, you can expect to see many traders ‘rebate trading’ where they buy and sell shares for exchange credits only.

One by-product of this new development is that institutions will need to be more careful about executing orders as predatory traders will use methods to discover big trades, and then trade against the institution for profit. Another possible downside is an increase in volatility if too many algorithms trade similarly. ‘Flash Crashes’ can happen quickly when allowing automated trading by computer programs.

Baby Steps

If you are interested in scalping, daytrading, or algorithmic trading from remotely home – there are a wide variety of free online equity trading courses, resources and books to get you started. With low transaction fees you can try it out using incredibly small orders of only 100 shares to see whether equity trading is for you. You should expect there to be a few bugs in the system to be worked out since low-latency/high frequency trading is new to Australia.

There are many perks but a few risks to consider as this new style of high-frequency trading is opened up in Australia and PureMatch and Chi-X Australia have taken an early lead to pioneer the technology to Aussies.