The Australian Securities Exchange (ASX) has proposed several changes to its trading practices and made a number of recommendations to the Australian Securities and Investments Commission (ASIC) following its review of the impact of algorithmic trading on the country’s equities market.
The review, which ASX began last July, noted that while the Australian equities market had not experienced algorithmic trading on anything like the scale or the type prevalent in other markets such as North America and Europe, continued technological advances would continue to drive growth in the proportion of trades executed by algorithms.
The exchange also expects any microstructure reforms in Australia along the lines of those seen in North America to facilitate a significant amount of additional algorithmic trading, particularly high-frequency trading and an exponential growth in the number of orders, presenting capacity challenges for brokers and infrastructures.
“As a result of the ASX review, there is work to be undertaken by ASX in its capacity as trading platform operator and by ASIC as the whole-of-market supervisor,” the review reads.
While the review concluded that the increase in algorithmic trading in Australian equities had not resulted in any significant supervisory issues or changes in the quality of ASX’s markets, the exchange noted a marked increase in the number of trade cancellations – to 338,951 in 2009 from 126,854 in 2007.
As such, the ASX intends to modify its existing trade cancellation policy to substantially shorten the window within which a trade can be cancelled and introduce cancellation fees to discourage deliberate execution and subsequent cancellation.
The exchange also plans to streamline the decision process for removing brokers’ market access, including the introduction of an automated process for preventing electronic access to the market in the event of a malfunctioning algorithm that could harm market integrity.
Further plans include reviewing the need for security specific ‘circuit-breakers’, enhancing ASX’s direct market access offering subject to the development of appropriate pre-order filters and other controls, and ensure clearing and settlement participants review their capacity and business continuity planning with regard to the future growth of trades to process.
In addition to the changes to its own practices, ASX has also recommended, among other things, that ASIC requires all brokers and clients to appropriately test algorithms before connecting to a trading platform, prohibits market operators from allowing brokers to offer unfiltered market access to clients and ensures brokers, particularly smaller ones, review their business continuity planning in anticipation of significant increases in order traffic.
ASX will transfer trading supervisory powers to ASIC in Q3 2010, which is widely expected to allow alternative trading venues to operate in Australia.