As The Government Investigates, Is There A Rat At The RBA?
Recently we wrote an article here about why the Australian dollar moved ahead of the RBA’s interest rate announcement. By now you’re all aware that on the first Tuesday of each month the RBA meets to discuss monetary policy. Following this meeting, at 2:30pm, the Reserve Bank of Australia Governor Glenn Stevens makes an announcement as to whether he will adjust interest rates or leave them on hold.
This market announcement is a critical monthly event and one that influences both the stock market and the Australian dollar. Traders and market participants devise their trading and investment strategies based on the outcome of this statement and await the RBA’s decision with bated breath. Therefore, any insider information or leaks in the release of this news can allow the recipient of this information to profit significantly. Insider trading is illegal and the regulator has a number of mechanisms in place to ensure market inefficiencies are kept to a minimum. However, the last three interest rate decision statements have been marred by speculation of material news leaks with erratic trading seen on each occasion mere moments before the news release. On Tuesday the Australian regulators said they were investigating the Australian dollar price movement which in this instance rocketed up about 1%.
If Its Insider Trading, Will The Regulator Actually Get To The Bottom of This Mess?
With this irregularity occurring three months in a row it is easy for sceptics to brand the regulators a toothless tigers. However, when it comes to Foreign Exchange trading, irregularities are easily traceable. Today’s modern Forex trading software keeps a recorded history of all trades and orders. Regulators can very easily obtain the information they seek from Forex brokers which is what the government did when they prosecuted the now infamous NAB trader Lukas Kamay. In this instance, Pepperstone, Kamay’s Forex broker of choice, raised the red flag with the government and the Police after they noticed trading anomalies. For 3 months from the 19th of February 2014 Police were able to track each trade he made thanks to the tracking mechanism available in Forex broker software.
What If High Frequency Trading Is Involved?
High frequency traders are ultra-fast computers that allow traders to maximise profits by getting the best positions possible in the queue to buy and sell Forex pairs. Algorithmic traders were originally launched on equity markets and currently account for about 10% of all trades settled on the ASX. These traders are often used by large offshore hedge funds and are located close to exchanges or liquidity providers giving them an advantage by reducing trade execution latency. This split second head start combined with their highly powerful automated trading software ensures they have a much higher chance of executing profitable trades. A number of top Forex brokers now offer traders the ability to create their own Expert Advisors or trading robots through platforms such as MetaTrader 4 & 5. At this stage the concern regarding high frequency trading is related to equities and interest rate futures markets. Its not to say it doesn’t concern the world of Forex, but high frequency trading is not as prevalent in currency markets at this time.
What Effect Does High Frequency Trading Have on Forex Markets?
Regardless of whether high frequency trading is at play here or an RBA insider leaking information, the potential effects on Foreign exchange markets are disastrous and destabilising. It also has the ability to completely drive retail traders out of the market by better equipped institutional traders. There is also the potential for hundreds of small Aussie businesses operating in the Forex training niche to go out of business. A number of these Forex training course operators such as Traders 4 Traders teach aspiring Forex traders to profit in currency markets by responding to material market events such as RBA interest rate announcements. As more and more algorithmic trading technology is used to get a head start in financial markets, local traders are squeezed out as they can’t compete with automated trading robots. Not only does this have a destabilising effect on currency markets but it also might be to blame for the trading spikes witnessed ahead of the previous three RBA interest rate remarks.
It’s hard to truly tell whether leaks or high frequency trading is to blame in this situation but I am certain of one thing; the Australian economy is not in a good place. Market integrity and efficiency is always important, especially when consumer sentiment is poor. For the sake of the current Government and the economy, the government needs to get to the bottom of this mess post-haste. I have full confidence in the regulators ability to bring insider traders to justice; It shouldn’t take them too long to find the rat at the RBA. I’m a bit more sceptical when it comes to reigning in the disparity caused in currency markets by algorithmic trading.