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'.”