Changes to rules governing dark pools in Australia on 26 May may prompt a shift of equity market liquidity back onto lit trading venues, but mid-point crossing services are expected to thrive.
In October 2011, the Australian Securities and Investments Commission (ASIC) consulted the market about Australia's dark liquidity rules. It asked about price improvement and on imposing a A$50,000 threshold on off-exchange orders if dark liquidity increased by 50% in absolute terms within a three year period from mid-2011.
There was both support and opposition to proposals, but ASIC determined that signs of a decline in the quality of price formation justified a rule change.
As a result a price improvement rule will now take effect on 26 May 2013. The basis of that will be to forbid trades below block size that do not exhibit an improved price.
"One of ASIC's objectives in banning crossings below block size without price improvement is to improve the overall integrity of the market, but the minimum size threshold on dark pool operators will have the side-effect of reducing volume of non-displayed trading" says says Kent Rossiter, head of trading, Asia Pacific at Allianz Global Investors. "Like what we've heard in other markets, there's concern that if liquidity shifts away from being displayed on lit venues then investors may not get the best possible pricing because of deteriorating price formation."
ASIC noted in CP 202, a report about dark liquidity and high-frequency trading, published in March 2013, that it will continue to watch dark pools, and may introduce additional regulation.
"The growth of dark pools was starting to have an impact on price formation in the lit market. I think that the volume of trading in dark pools will decrease and volume of trading on the lit markets increase,' says John Fildes, CEO of Chi-X Australia. "I think we will also see greater usage of ASX's Centerpoint, and hidden orders on Chi X."
Clare Rowsell of brokerage ITG, which as part of its service provides access to dark pools, is more optimistic.
"The new rules will mandate meaningful price improvement for dark orders so that trades must be crossed at the mid-point or improve by a full tick. This will exclude dark trades that, in the past could have been done at the NBBO (best bid or offer) and as a result some dark pools may witness a drop in their volume. However most agency institutional crosses, like ITG's POSIT, already execute most of the flow at the mid-point which fulfils the price improvement requirements. We would therefore expect agency pools that serve the institutional market to maintain similar levels or even grow market share. This is in line with a trend seen in Canada when similar rules were put in place."