ASIC probes dark pool

Australia’s market regulator has revealed that it is investigating a dark pool, as part of its latest report on the supervision of the country’s financial markets and market participants.

Australia's market regulator has revealed it is investigating a dark pool in its latest report on the supervision of the country's financial markets and market participants.

The report from the Australian Securities and Investment Commission (ASIC) covers incidents between July and December and is a requirement of its market supervision activity.

The watchdog is preparing to release new rules on dark trading next month, which may include a minimum size threshold for all dark orders and a requirement for non-displayed orders to provide price improvement over displayed market quotes.

Industry estimates currently put the level of dark trading in Australia at around 15%. Dark pools operating in Australia include block-focused venues like Liquidnet and ITG POSIT, as well as broker platforms, such as those operated by UBS, Nomura and the Australian Securities Exchange's (ASX) Centre Point service.

The regulator also said issues related to problematic algos and high-frequency trading (HFT) continue to be of concern, with a total of 23 incidents related to execution strategy, algorithmic trading and filter issues. During the six months analysed, several market participants agreed to implement new filters and processes to ensure orders are reviewed before hitting the market, following questioning by ASIC.

"The work undertaken by these taskforces, as we foreshadowed in our last report, buttressed our surveillance and policy work. Five HFT matters were referred to enforcement, and since the end of the reporting period, the dark liquidity taskforce has also referred a matter to enforcement for investigation," said Greg Yanco, executive leader of market and participant supervision, ASIC. "As always, ASIC has worked closely with market participants on matters relating to problematic algorithms, in particular wash trades – which occur when one account executes both sides of the trade."

The report showed the average trade size on Chi-X Australia increased in the six months to December to A$3,330 from A$1,400. Average trade size on the ASX remained steady between A$6,000 and A$6,500. The number of orders to trades on Chi-X Australia declined to 15:1 from 23:1 in the same period, and remained at around 7:1 on ASX.

ASIC took over responsibility for market monitoring and surveillance from the ASX in August 2010 as part of the market preparation for the introduction of competing trading venues, namely Chi-X Australia.