Research tests computer-driven crash theory

But with the category of traders known to have accounted for as much as 45 per cent of orders over the sharemarket and 25 per cent of turnover, Mr Lepone explained their withdrawal during a period of market stress had other consequences.

“HFT are obviously… a very important part of liquidity provision in normal market activity.

“They’re there to take, to offer, to buy when people want to sell, and offer to sell, and people want to buy. Now, obviously, in very volatile markets they’ve chosen [to walk away].”

Because people still need to sell, “you widen the spreads [and] you reduce the depth.”

The consequence for the remaining sellers in the market is to speed up the pace of price declines, Mr Lepone added, which can see shareholders such as retirees who may be reliant on the proceeds crystalise greater losses.

While also seen as a significant factor behind the speed of this latest market crash, automated trading attracted the ire of stock exchanges and regulators after previous sharp falls such as the May 2010 “flash crash” which saw the US benchmark S&P 500 index plunge 5 per cent in four minutes.

Mr Lepone explained that he is not critical of the role of HFT in the market but said he believes there is scope for regulatory intervention to ensure the dramatic fall in liquidity during periods of market stress does not have a perverse outcome.

And the rise of HFT in the Australian context prompted an investigation from ASIC, which warned that “their enormous contribution to market activity has made them a focus for regulators.”

Since fading during the height of market uncertainty, HFT has increased again, with the order-to-trade ratio rising nearly 6 per cent in the June quarter to 7.5 orders for every trade.

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