With the consultation by the Australian Securities and Investments Commission (ASIC) on the country's equity market structure drawing to a close, proposals for a size limit on dark pool orders and the tiering of block trades may attract most attention, says Will Psomadelis, head of trading, Australia at Schroders Investment Management.
“The consultation paper allows an active grey market to take place and for large blocks to be crossed through dark pools outside the spread, which obviously helps price formation. In that respect, the paper has done quite a good job in allowing for flexibility,” he says.
ASIC made the proposals in Consultation Paper 145 (CP-145), titled ”Australian equity market structure', in November. The paper also addresses options for modernising Australian market structures and processes in light of developments in the global capital markets, such as the 6 May ”flash crash' in the US. In the draft document, ASIC expressed concerns about increased activity in dark pools and proposed a A$20,000 limit, i.e. orders in dark pools must have a minimum size of A$20,000.
Market participants feel that the rule could have a negative impact on dark pools, which include algorithmic flows and may be crossing individual orders of less than A$20,000 at present. More importantly, perhaps, large orders forced onto lit venues may suffer.
“Some of our algorithms may have to be rewritten which adds to costs, but if the main objective is to increase the quality of the central limit order book (CLOB), the cost of rewriting the algos could be a small price to pay,” acknowledges Psomadelis. “Our concern lies in that forcing trades onto the CLOB provides easy pickings for predatory algorithms.”
Psomadelis also has reservations about ASIC's proposal for the tiering of block trades. The Australian Securities Exchange (ASX) currently has a threshold of $1 million for block trades and has consulted market participants – in both 2007 and 2008 – on the possible introduction of tiers. In its recent consultation, ASIC proposed a tiered regime to “better reflect trading interest in equity market products” and sought feedback on what the different tiers should be and the frequency for reviewing the products in each tier.
“While it works in theory, tiering the size of block trades adds a level of complexity and an element of cost to brokers. Maybe a smaller fixed amount is more applicable considering any crossing over A$100,000 is more likely to improve price discovery than destroy it,” says Psomadelis. “Research undertaken on behalf of ASX at the time of its consultations indicated that a product-by-product approach was theoretically the optimal solution, with thresholds set at 2.5% of average daily volume.”
According to CP-145, “This was chosen as the level beyond which the net benefit – in terms of price impact – of taking trades off the order book would become positive. ASX concluded that since liquidity in each product is different, this approach would not be practical because it would result in a different threshold for each product and may vary on a daily basis.”
The consultation period for ASIC's proposals closes in 21 January 2011, after which the regulatory guidance will be released “as soon as reasonably practicable”, according to the regulator. Competition between the ASX and new displayed-liquidity trading venues such as Chi-X Australia, which had hoped to launch by Q1 2011, is expected to be pushed back until final guidelines are released.
“ASIC has certainly have made every attempt to listen to the market's views, and we're all waiting with bated breath,” Psomadelis says.
Other proposals in CP-145 include formal obligations on market participants to deliver best execution to clients. The consultation paper proposes that “a market participant must take reasonable steps to obtain the best total consideration (may be interpreted as ”price') for clients” and that “market participants must have policies and procedures for complying with the best execution obligation”, amongst others.