Elmer Funke Kupper, Australian Securities Exchange (ASX) managing director and CEO, has cited dark execution as the ASX’s number one concern. The ASX recently submitted a range of proposals to the Australian Securities and Investments Commission (ASIC) outlining the measures the lit exchange feels need to be employed to deal with dark pools. Foremost among them is the proposal for a A$25,000 minimum order size, as well as regulating dark orders below block trade sizes; as is done on the lit market. The ASX believes there is strong evidence internationally that if dark pools grow too big, they increase costs to investors, widening spreads and negatively impacting price discovery.
Speaking at the exchange’s results last week, he called such measures “simple steps” and issued a warning against inaction, saying: “We of course have to implement it; we can’t just sit on our hands and watch it because that’s what they did in America.”
But at his results presentation, Kupper gave no hint of whether ASX’s proposals were likely to see acceptance from regulators, commenting: “We think we are getting a sympathetic ear to it but it’s not up to us. But we are not going to go quietly because we think it’s genuinely wrong.”
According to the ASX, in the first half of this year 25% of value traded as dark execution, going as high as 43% and as low as 14%. While there has been some argument that these figures may not paint the most accurate picture of dark trading volumes in the country, Kupper believes this will grow over time.
“We think there should be very strong controls to make sure the lit market remains relevant because that is the only market... in this country where every investor can get the same deal and trade every equity and every fund and every instrument,” said Kupper, adding: “It is the only place and so it has to be relevant and we are very concerned that liquidity is being removed, because finance theory tells us that the best way – the most efficient market – is one where liquidity gets funnelled to one place by all investors.”
Kupper later dubbed dark pools “unregulated private exchanges”.
Lee Porter, head of APAC at Liquidnet, commented that “the debate rages on right now,” noting Liquidnet has also contributed to discussion with ASIC. “We feel that people must understand that not all dark pools are the same. We work in a very different way.”
He notes that, for example, the average trade on Liquidnet in Australia is A$1 million, almost 160 times bigger than the average on the ASX of A$6,000.
On the A$25,000 minimum order size proposed by the ASX – which is far higher than the average trade size on the ASX at present – Porter said “I don’t think they’ve landed on the right number yet”.
He notes, though, that when high frequency trading is introduced onto any exchange, it pushes the average order size down rapidly, as has been seen on the ASX in Australia. Porter added that he believes ASIC’s consultation process has been “smart”, noting they have taken the time to talk with many different parts of the market, and that this should help them avoid unintended consequences of introducing new regulation, as has been seen in other jurisdictions.