Nov 28, 2012
ASIC reforms to change 'complexion' of Australian markets
New market integrity rules issued by the
Australian Securities and Investments Commission (ASIC) in response to growing
use of automated trading and dark liquidity will improve overall safety, but at
a cost to some market participants. The rules will be phased in over the next
18 months and include kill switches and extreme trading rules for high-frequency
trades, as well as new requirements for dark pools relating to meaningful price
improvement and reporting. Other additional measures have also been tabled,
including re-introducing a minimum order size on dark trades.
‘The rules, the result of industry consultation
dating back to 2010, address issues ASIC considers necessary to maintain fair,
orderly and transparent equity markets,” said ASIC chairman Greg Medcraft last
week.
Alex Frino, chief executive officer of the
Capital Markets Cooperative Research Centre (CMCRC) in Sydney comments that the
introduction of kill switches is a “good move… it will prevent a ‘robots gone
mad’ scenario and will protect market integrity”. Frino adds that “it foists
the responsibility for switching off the server of a client that is causing a
disorderly market on the broker.”
Previously in the instance of disorder in the
market, the regulator would have to get in touch with the client itself. Frino
notes, though, that the actual instances of market disruption caused by algos
are extremely rare. How the regulators will define a market disturbance has yet
to be fixed, and the regulator will eventually need to provide brokers with
guidance.
A second component of the new rules on
high-frequency trading (HFT) requires brokers to filter each order submitted by
client.
“This will have unintended consequences. I
believe it will increase latency, and that may change the composition of the
HFT community – some sections of the community are very latency sensitive and
their business might no longer be viable.”
Frino
believes that one of the unintended consequences could be that it makes
'parasitic' traders more potent, with the greater latency. “It could completely
change the complexion of the market.”
David Jenkins, head of business development at
Fidessa, commented that the updated regulations on HFT were "not a surprise”
noting that changes follow international guidelines, though he did also
highlight the cost of compliance the new rules. He said that with the kill switches
and credit checks “there’s a very real risk of regulatory cost becoming a drag
on the business model of a lot of brokers. Markets are down and brokers are
earning less commission, but regulatory costs are increasing." He added
that this could further encourage the shift to non-member exchanges.
On dark pools, Frino notes that with ASIC
proposing a licensing regime it has “recognised that dark pools are de facto
exchanges. Whilst in lit markets there is incredible scrutiny of whether orders
are manipulative, there has been no scrutiny of dark pools; so this proposal is
in recognition of this.” However, he notes that licencing
will inevitably lead to greater surveillance and compliance requirements, and
that this will cost ASIC money. ASIC's policy of recovering costs from the
industry could drive up costs for players, which might be a challenge for
smaller dark pools. There are currently 16 dark pools in Australia needing
oversight.
Frino was also positive on the proposed
re-introduction of a threshold minimum order size for dark pool trades.
Previously the regulators specified a A$1 million minimum, whilst current
proposals are for in the region of A$25k or A$50k. Frino notes that whilst one
million may have been too high, the higher benchmark would generally be better
than lower.
Jenkins, however, believes that the
re-introduction of minimum order sizes could force brokers to “standardise”
their business models. “It’s not a very attractive environment, and that’s why
we’re seeing brokers shift into clearing and non-participant broking. We’re
already seeing some close-up shop.” He added that if clients are squeezed
towards a smaller number of brokers this could ultimately end up as
concentration risk. However, Jenkins also notes that the requirement to prove
that there is meaningful price improvement in a dark pool is much less
problematic.
Harry Thompson