The Australian Securities Exchange (ASX) Group, the operator of the Australian Stock Exchange and the Sydney Futures Exchange, has launched a review of algorithmic trading on its platforms in a bid to weed out activity that could be detrimental to market participants overall.
The review, which ASX aims to complete in November this year, is designed to identify improvements to the exchange operator’s rules framework, supervisory and operational processes, and technology infrastructure to ensure that it continues to meet the needs of customers and operate its markets effectively.
Based on an analysis of generic algorithms and individual broker offerings, the review aims to set out the potential supervisory, operational and capacity issues raised and make a set of recommendations to improve operations over the short-to-medium term.
ASX said these recommendations may include specific initiatives such as requiring brokers to identify orders generated by trading algorithms, preventing certain types of trading behaviour through new system functionality and/or rules, and developing new system functionality and/or processes to identify trading behaviour that may indicate a breach of the rules.
In its annual assessment of ASX, financial markets regulator Australian Securities & Investments Commission (ASIC) recommended that the review consider aspects of direct market access (DMA), including the adequacy of risk and operational requirements for participants offering DMA to clients, the accountability of participants for their clients’ trading activity using DMA and developments in international best practice standards for the provision of DMA and the supervision of algorithmic trading.
ASIC will assume responsibility for the supervision of real-time trading on Australia’s exchanges from ASX in Q3 2010.
ASIC expects ASX to report to it on the algorithmic trading review by 21 March 2010.