Alarms sounded over high frequency trading

Fears over the affects of high frequency trading on miners have now surfaced in Australia.

OZ Minerals chief Terry Burgess had raised concerns that the practice may be behind the company's falling share price, according to the Brisbane Times.

The practice allows people to carry out thousands of trade a second, increasing the volatility of the market and putting many smaller miners' stock at risk.

Much of this trading is automated and unregulated.

It also creates more liquidity in the market and in turn creates lower costs.

It is believed that the annual profit of high frequency traders may sit around the US$20 billion mark in the US alone.

While it is legal in Australia, Canada, and the United Stated, it has been banned in some jurisdictions.
Burgess explained that he has seen OZ's "share price [become] extraordinarily volatile over the last few weeks and we are uncertain about some of the things that are going on".

'We are seeing those big volumes of shares traded but for relatively small values … there was a day where 60 per cent of our trading had less than 100 shares traded.''

The potential of this form of trading to harm the market has now forced ASIC to consider implementing new trading rules.

According to the National Post this is already been done by other nation's regulators, as "many in the financial industry, from bankers to regulators and even some former practitioners, acknowledge that the growing practice of lightning fast electronic trading needs to be monitored — a move that appears more likely as international regulators ponder curbs in the wake of wild market swings and technology glitches.

Burgess added that trades of five and six shares at time were becoming more common, making the number of shares traded daily extremely larger.

"I don't think it's just with OZ Minerals, I think there is a number of companies that are seeing this and I guess it is high-frequency trading.''

He went on to state that it is damaging the industry's share prices as it operates in the short term rather than the long term, where many most miners operate.

I don't think we want to see a share price as volatile as it is,'' he said.

''We are thinking long term … the ethos of a mining company in theory is something where people think in the long-term frame, I'm not sure if the day traders and very-high-frequency trading is something that really fits in with what a mining company is trying to do.''

The danger of high frequency trading to mining has already been brought to the fore in Canada.
MacDonald Mines Exploration's president Kirk McKinnon said that high frequency trading is directly impacting mining stocks.

With share rapidly changing hands it creates less confidence in affected mining companies and makes further financing more difficult to obtain, with McKinnon adding it has reached a point where "large Canadian national banks have certainly discouraged, and all but disallowed, any trading in junior mining stocks".

"We should also look at disallowing short selling for all stocks less than one dollar," he said.

Canada's Securities Administrators are already one step ahead of the ASIC, and will unveil new rules in March to address risks related to credit, technology, and regulatory arbitrage in a bid to 'rein in the noise' the high frequency trading creates.

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