The Australian Securities and Investments Commission (ASIC) has made good on threats to increase controls on algorithmic and dark trading, outlining a series of new market integrity rules.
The new rules provide for direct control over trading algorithms, including ‘kill switches’ to immediately stop an algorithm if required; new extreme trading rules in cases of large price movements; a requirement that dark pools offer meaningful price improvement over the lit market, with exemptions for block trades; and additional data reporting requirements to assist ASIC in performing market surveillance.
The market integrity rules will impose an immediate obligation on the market operators, the Australian Securities Exchange and Chi X Australia, to enforce an extreme trading range for trades in securities. There will also be new data reporting requirements on operators from 2013.
For market participants, new obligations will come into force over a six-to-18 month period, with the possibility of more rules to come. Effective immediately, the extreme trading range rules will apply to trades conducted on the Australian Securities Exchange and Chi-X Australia. From June 2012, the meaningful price improvement rule will come into force, while the market operator data reporting requirements will be effective from November next year. Kill switches, automated extreme trading range control and enhanced data supervision will not come into play until June 2014.
“I am aware that some investors have expressed concern about the use of high-frequency trading (HFT) and dark pools. The government is acting to ensure that investors have continued confidence in Australia’s financial markets. I believe that these new rules will help to reduce the risk of market volatility from HFT and provide increased investor protection for retail investors and others trading in dark pools,” said Bill Shorten, Australia’s minister for financial services.
ASIC is now in the process of analysing options and recommendations to further manage HFT and dark liquidity. The types of options presently being considered for dark liquidity include: whether the minimum order threshold should be increased from zero, enhanced conflict management controls, rules for trade monitoring, and enhanced disclosure to clients, while further HFT rules may include order to trade ratios, minimum order size and a review of tick sizes.
ASIC will report its findings in March 2013.