Non-displayed venues in Australia have escaped further limitations on their operations, with the nation’s regulator revealing it would not make any new rules on a minimum size threshold for dark orders until consulting further with the industry.
But in its long-awaited response to a consultation on market structure reform, the Australian Securities & Investments Commission (ASIC) said it would develop a new pre-trade transparency rule on price improvement and alter 'block' sizes. The regulator said it would replace the current definition of a block order at A$1 million with a more flexible regime governed by liquidity levels.
The watchdog said respondents to CP 168 – the second-phase consultation paper on equity market structure – were divided on dark pool liquidity and transparency. ASIC had proposed to impose a A$50,000 threshold on dark trades arising from limit orders if dark liquidity below block size grew by 50% in the next three years.
“Along with industry feedback, we have considered recent market developments here and overseas including the increasingly automated nature of trading and the trend towards more frequent, smaller trades, away from public markets,” said Belinda Gibson, ASIC deputy chairman.
Gibson said while the industry had recognised the watchdog’s concerns about pre-trade transparency and price formation, there were widely divergent views on the extent of the problem, and the appropriate response – especially from exchanges and operators of dark pools.
Block trading venue Liquidnet and Goldman Sachs' recently launched Sigma X are among the dark pools operating in Australia.
The consultation paper had also broadly addressed automated and algorithmic trading. In submitted responses, ASIC said there were differences of opinion about whether rules were presently needed specifically to curb algo trading, with many respondents believing existing rules were adequate for participant responsibility for trading messages submitted to the market. Some respondents suggested ASIC publish guidance to clarify its expectations of conduct under the existing rules, rather than make new rules.
ASIC has decided not to develop any rules demanding algorithm testing but said it would push forward with developing a mandatory kill switch for algos, in a bid to avoid the prospect of a US flash crash in the Australian markets.
The CP 168 consultation ran from 20 October last year to 20 February and sought comment on high-frequency trading, volatility controls, best execution and market data, as well as dark and algorithmic trading.
ASIC will continue its consultation throughout the next two months and prepare draft market integrity rules and guidance by the end of May, opening its proposals up to a four-week consultation in June. Final market integrity rules should be published by October, with rules scheduled to take effect via a staggered implementation to end Q1 2014.