KGB Interview with ASX’s Kupper


No – not the KGB you are thinking of – rather Kohler, Gottliebsen, and Bartholomeusz of Business Specator. But man, those guys are tough; they interview the Australian Stock Exchange Chief, Elmer Funke Kupper, and you can watch the interview and read the transcript here. Please do so; we all have the extra time nowadays with our deserted markets and all…

The interview is fascinating to us, as there are repeated references to our failed market structure in the United States – from both side of the interview!

–          EFK:        So here in Australia high frequency trading is perhaps 15 to 25 per cent of the market, in the US it can be 70 per cent on any given day. Dark execution is about 25 per cent of the market, as high as 40. So, I think overseas markets give us a bit of a guide of how badly this can end.


–          EFK:        I use the word badly because markets are all about confidence and when the market structure changes and the unintended consequences of that start to shake people’s confidence in what the market is there for, I think we take an enormous risk against which we don’t see a lot of benefits – and it’s the reason that we’ve said [that] in Australia we’re still okay.


–          EFK:       When it comes to dark pools, we know from academic research that the more liquidity you take away from the one place that everybody gets together, the more damage you do to price discovery and the spreads in that market.


–          EFK:        So what we need to do is, rather than cut the pipes (to HFT), make sure that the economic incentives of the behaviour are more aligned with the market place and it’s important to think about that because if we look at the contrasts between the United States and Australia, one of the reasons we are in a better place is that the regulators here are not allowing some of the practices that are allowed in the United States and economic incentives are a bit more aligned with the market.



–          RG:           I think that we now have in Australia a situation where people are losing faith in the equity market, as they’re doing in the States too, and the first thing that you have to do is to make sure that they get a free and fair access to the market as they used to have and they no longer have and the reason we’ve got dark pools is because of high frequency trading.


–          EFK:        What I’m saying is the consequences of fragmentation and the trading models that that allows to create can be damaging unless you manage it well… There’s a connection between the two (dark pools and exchanges) because fund managers tell us they’re going ‘dark’ because they don’t want to be in a place where they run into high frequency traders that front run. So, high frequency traders, the solution there is to manage their economic incentives much better so that front running becomes an expensive thing to do for them


–          EFK:        Okay. Let’s start at the beginning. We didn’t ask for a change in market structure that’s created all this. In fact the people that operate the dark pools have. I mean that’s the truth. And so, we have groups of people here who say, on the one hand we want competition and we want to foster high frequency trading and some of their own proprietary trades are high frequency. On the other hand, they say, here’s a dark pool for you the fund manager to deal with. So, you know, they’re playing both sides. We have over the last six months been very active as an exchange to bring fund managers into the debate and we’re delighted they’re involved and I wish they had been involved two or three years ago because we may not find ourselves in this position.

So, what I’ve explained to anybody willing to listen including regulators is that the fact that fund managers do not put submissions into a formal review process does not mean they’re not relevant. I think we have an obligation to reach out to the end consumer and the end consumer is not the ASX, it’s not the investment bank or the broking community, it’s the fund manager and the retail investor. And I think in this particular scenario we have not reached out to them before we made a change in market structure. Had we done it, we might have made a different decision. I can’t change that. It wasn’t my choice. But now we have to deal with the consequences. And the proposals that we put forward deal with the consequences. They’re unpleasant – I don’t disagree with anything you’ve just said – but the question is what do we now do recognising we can’t turn back time as far as we would like? There are other markets in the world who have said we don’t want to go here at all.


I have highlighted quite a bit of the interview. It is fascinating. KGB asks the CEO of the ASX very pointed and tough questions about morality, the for-profit exchange model, and Exchange accountability for their role in changing markets for the worse. And Kupper answers them very frankly and with poise. It makes for an outstanding and educational interview, and we hope you read through it!


We have said repeatedly in the past that the extreme levels of HFT we have seen in the US, which is a level that short-term-oriented for-profit stakeholders will take it, regardless of geography or instrument, will hollow out a market until it is a barren field. And then HFT firms will move to other asset classes and geographies, until it does the same to them.


Frankly, don’t you think that if our regulators could have a do-over with Reg NMS they would take it?  We do. The question is now, after the damage has been done, how can the SEC mend this broken market? We love the idea of abolishing the maker-taker model, as that model is distortive to price discovery, and as Kupper has alluded to in the interview above, it does not align economic incentives of traders and investors.