The Australian Securities and Investments Commission (ASIC) will not introduce new regulation for high frequency trading and dark liquidity, finding that existing settings “are largely adequate and effective.”
ASIC has released a report examining the impact of HFT on Austrlian equities and futures makrest, and dark liquidity on Australian markets. The report was the result of two recent reviews, which built on ASIC’s analysis in 201, assessing the impact of HFT in Australia.
“ASIC has concluded that current levels of high-frequency trading and dark liquidity are not adversely affecting the function of Australian markets for businesses and investors,” says Cathie Armour, ASIC commissioner. “Financial markets play a critical role in the Australian economy. It is vital that they are fair, orderly, transparent and efficient and that investors can have trust and confidence in their operation.
“The reviews indicate that the existing regulatory settings for high-frequency trading and dark liquidity, including reforms we introduced in response to the findings of our 2012 reviews, are largely adequate and effective.”
ASIC finds that market users “have become better informed and equipped to operate in an electronic and high-speed environment, and negative sentiment about high-frequency trading has reduced,” the report finds. The level of HFT in Australia’s equities markets has remained mostly steady at around 27% of total turnover.
By contrast, HFT has grown by 130% in the futures market since December 2013 to 21% of volume traded in the SPI and 14% of bond futures. ASIC will continue to monitor these levels, but says they are not “currently concerning.” The report finds that HFT traders have been more sophisticated, generate higher gross revenue and trade more aggressively than 2012, and are more active in mid-tier securities. ASIC did note that they are conducting inquiries into a number of traders for excessive order entry and cancellation in the ASX 24 market during the quarterly expiries.
“This practice affects other market users because it prevents the prioritisation of their orders and forces them to cross the spread (i.e. pay more),” ASIC says in the report. “We have asked ASX to consider what steps may be taken to discourage this practice.”
Dark liquidity has remained “reasonably” constant in recent years at around 25–30% of total equity market turnover, ASIC says. The composition of dark liquidity has changed since 2012’s review, ASIC says – since 2012, there has been a shift back to using dark liquidity for its original purpose, for large block trades.
“Feedback from stakeholders also indicated that there was now less concern with dark liquidity in our markets,” ASIC says. “Concerns ASIC previously held about the transparency and fairness of market participant-operated crossing systems have mostly abated. However, ASIC remains concerned about exchange market and crossing system operators seeking to preference some users over others. It is concerned about the methods used by some market participants to manage their conflicts of interest for principal trading and client facilitation.”