High frequency trading needs further explanation
The investment industry needs more information on a number of "black holes", in particular high frequency trading (HFT), according to chief researcher at van Eyk, John O'Brien.
O'Brien told the audience at van Eyk's annual conference in Sydney yesterday that HFT, along with collateral hypothecation and bank valuation, were "black holes" in the industry and had unknown implications for investors.
The glut of information regarding HFT means, despite algorithmic traders now accounting for the majority of trading on the Australian Securities Exchange, the industry is uncertain what the implications are.
One school of thought suggests algorithmic traders are guilty of market manipulation, and O'Brien said investors needed to ensure they were not the "prey" in the financial "ecosystem".
"If you're a retail investor, if you're going to use exchange-traded funds, high-speed trading and market making do affect you," O'Brien said.
"On the one hand, the promise of exchange-traded funds is transparency, they are easy-to-use vehicles…but in some cases because the people on the other sides of the trade are often algorithmic, you could also say you need to be careful you are not the prey when you are making trades."
O'Brien also tagged collateral hypothecation as an unexplained issue or black hole that needs addressing by the industry.
He suggested that if European banks stopped re-pledging collateral as they did in the US following the global financial crisis, the supply of collateral would "drop off a cliff again."
He said collateral hypothecation was an important issue for investors because if affects the supply of collateral in the system.
O'Brien saw the valuation of bank assets as another unknown in the finance industry and questioned the reasons for different global bank valuations.
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