Jan 25, 2012
ASIC dark pool, HFT consultation extended after feedback flood
The Australian
Securities & Investment Commission (ASIC) has given market participants an
extra three weeks to respond to its second-phase consultation paper on equity
market structure following a large amount of input from the industry.
The deadline for
feedback on CP 168, issued 20 October last year, has been extended from 20 January
to 20 February. The consultation seeks comment on ASIC’s proposed market
integrity rules on high-frequency trading, volatility controls for extreme
price movements, pre-trade transparency and price formation, best execution and
market data supervision. Industry feedback to CP 145, ASIC’s November 2010
blueprint for reforming Australia’s market structure, persuaded the regulator
to park planned rules on which there was a lack of market consensus, rather
than delay the introduction of trading venue competition, which started on 31
October with the launch of Chi-X Australia.
While opinions still differ
on some of the proposals, ASIC is generally getting good marks for the way it
has examined the issues and sought a range of views on them.
Steve Grob, head of
group strategy at trading technology provider Fidessa, says ASIC’s refusal to
be rushed should be welcomed.
“Rather than just
following what other regulators have done, they’ve really tried to understand
the impact of what has happened in other markets,” says Steve Grob, head of
group strategy at trading technology provider Fidessa. “It’s important that ASIC
carries on like that and doesn’t feel compelled to be rushed into doing
anything. Moreover, these are huge subjects on their own; lump them all
together and it’s not very surprising that an awful lot of people have an awful
lot to say.”
Noting the global lack
of consensus on some of the topics being tackled by ASIC, Grob suggests HFT may
be the most contentious.
“The first challenge
in looking at HFT is coming up with an acceptable definition: a lot of people
have an opinion on it but very few can actually define what it is,” he notes. “The
second is whether it has any negative impact on markets. In may respects, many
of the HFT players are simply the modern-day, electronic version of a
traditional market-maker. And they have existed ever since exchanges were
created.”
However, Will
Psomadelis, head of trading, Australia, Schroder Investment Management, believes regulators have legitimate reason to want to dig deeper on
the issue of HFT
“Considering HFT may contribute up to 50% of
volumes in our market (remembering the difference between liquidity and volume)
it is important that they adhere to the rules we all play by, such as, and not
limited to, those relating to market-manipulation,” says Psomadelis.
Psomadelis also believes that volatility
controls, another of the main points on the consultation’s agenda, need to be discussed
in the light of increasing HFT activity.
“Considering we are
seeing a single stock ‘flash crash’ on an almost weekly basis in the US, I can
understand the concern by the regulators with regards to market integrity,”
says Psomadelis. “As the nature of dominant participants on the exchanges
is changing towards more automated strategies, volatility limits do make sense
as long as they don’t interfere with fundamental volatility.”
Grob, on the hand, urges caution on the role of volatility control mechanisms.
“The primary role of regulators is to regulate
markets, not prices. If the market thinks something is worth $2 or 2 cents,
then that’s what it’s worth. The minute you try saying ‘it’s not worth that, it’s
worth something else’, you’re taking a very arbitrary stance,” remarks Grob. “The
point I always come back to is that the ‘flash crash’ only lasted a few minutes
and it largely went unnoticed in the retail investment community.”
Opinions are also divided on the issue of dark
pool liquidity and transparency. ASIC proposes replacement of the current
definition of a block order at A$1 million with a more flexible regime governed
by liquidity levels. The regulator has also suggests that a A$50,000 threshold
be imposed on dark trades arising from limit orders if dark liquidity below
block size grows by 50% in the next three years.
“With regards to dark
pools, it is important to understand that post-trade transparency, especially
at the block level, is a vital form of price discovery irrespective of the
mechanism used to achieve it - dark, upstairs, lit etc.,” suggests
Psomadelis. “The problem is that people are only now making a distinction
between traditional dark block trading facilities, which add a
significant amount of value to the market, and internalisation engines where
market makers are likely to be the dominant counterparty.”
Psomadelis describes the idea for a minimum
order size for dark trades as “appealing” but would like to see it introduced
at “a level significantly below the proposed $50,000” to help prevent “pinging”.
“If the market - internalisation engine
owners - has failed to give us a solution through a minimum crossing size in
dark pools, then it is unfortunate, but we have to rely on regulation to do so,”
he adds.
“Pre-trade transparency provides yet
another challenge for ASIC as it does in Europe – yesterday’s post-trade information
is required for pre-trade transparency today. And without any kind of official consolidated
post-trade tape, there will always be some confusion in the pre-trade world,”
says Grob.
The proposals for extending the asset-class
scope that best execution covers also need careful examination according to
Grob. “The question to ask all regulators is whether people are getting better
execution from what exists already. In Europe, for example, a large number of
our buy-side clients would answer 'don’t know' or 'no'.”