Why is illegal front running allowed on the ASX?
Project: Front Running is supposed to be illegal on Australian stock exchanges (ASX) as it means trading bots are given access to submitted broker client orders before execution and can selectively jump ahead to capture profits at the client's expense.
The ASX, ASIC and relevant law are supposed to prevent front running "if trading ahead of client orders disadvantages clients." Yet, this is exactly what currently occurs on the ASX with the CBOE Australia (formerly Chi-X) exchange used by High Frequency Trading bots to mine front running profits.
Presumably, the ASX is paid to facilitate this. ASIC appears to suffer from regulatory capture and could easily ban this but so far hasn't.
Impact: Apparently, ~20% of daily trade volume is on the CBOE, so I estimate the annual loss to Australians is hundreds of millions of dollars a year.
Mission: Investigate the scale of the annual profit extraction and who is being paid off to enable this.
> Simple Explanation of Front Running
Issue:
Operators of HFT bots on the CBOE Australia exchange are paying to see submitted broker client orders (e.g. CommSec clients) a fraction of a second before they are placed in the market. The HFT bots can then front-run buy and sell orders or change/cancel their existing spoof bids/offers in advance.
This is meant to be illegal in Australia under the Corporations Act and the ASIC Market Integrity Rules. However, despite it being reported, ASIC has refused to do anything about it.
Data:
You can collect the data on most ASX-traded products where in the "Course of Sales" trade history you see CXA appearing regularly in the Market column (not ASX) and it is the only volume matched at a timestamp or the first part of the total volume matched at a timestamp.
You can verify yourself by either trying to buy or sell in such products and finding you get front-run or having orders already in the market and still seeing a CXA order jump the queue and take part or all of the volume you would have got. You may also try to match an existing bid/offer at the top of the ladder and find all or part of it mysteriously gets cancelled in the fraction of a second between submitting your order and it being placed in the market.
For example, below I was already in the market at the front of the queue buying WAX at $1.135. Yet, at 2:57:40pm, 2,000 in volume was bought at $1.135 in front of my existing order.
Links:
> Reporting misconduct to ASX FAQs
> YouTube: Brad Katsuyama - The Stock Market had become an Illusion