Responses to the market structure consultation paper issued by Australia's national regulator, the Australian Securities and Investment Commission (ASIC), have thrown up a number of disagreements between market participants, notably on dark pools, maker-taker pricing and the consolidated tape.
The consultation, titled ”CP-145, Australian market structure', proposed guidelines on a number of prominent market structure issues including dark pools, automated trading, post-trade data consolidation and the impact of competing trading venues. The consultation closed on 21 January and ASIC has said regulatory proposals will be made “as soon as reasonably practicable in 2011”.
ASIC's proposals for a minimum size threshold for dark orders have been backed by ASX, but block trading venue Liquidnet warned mandated thresholds would increase investor costs. To forgo the publication of pre-trade quotes, an order would either have to be worth A$20,000 or more and priced within the best bid and offer across all markets or be classed as a block trade or large portfolio trade. The threshold for being classed as block trade is A$1 million for the most liquid equities and A$500,000 for other equities.
“While there are comparatively few dark pools in Australia today, there is a risk of proliferation if we wait for the debate to play out overseas before we take action,” read the consultation.
In its response, the Australian Securities Exchange (ASX) underlined the importance of protecting the price formation process and applying equivalent rules for similar activity.
“ASX strongly supports ASIC’s proposal to limit leakage of trades to dark pools through imposing exceptions to pre-trade transparency requirements according to monetary thresholds (block trade and small trade thresholds) which would be set by reference to the amount of liquidity in a stock,” read the ASX response.
However, block trading venue Liquidnet, which operates in Australia via a broker licence, came out against mandated thresholds to forgo pre-trade transparency, observing that they would increase trading costs for institutional investors.
If the proposal is upheld however, Liquidnet recommends a minimum threshold of A$100,000 for all block trades. By comparison, the ASX suggested a threshold of A$2.5 million for the 12 most liquid stocks, A$1 million for the next 20 most liquid stocks and A$500,000 for all other stocks.
Chi-X Australia, an alternative trading system awaiting the results of consultation before getting a licence to challenge the ASX, said more dialogue with market participants is required before a decision is made on dark trading.
“We appreciate that a good price formation process is dependent upon having liquid ”lit' markets and so I understand why ASIC is trying to get the balance right,” said Peter Fowler, COO at Chi-X Australia. “But it is probably best for the participants to consult with ASIC to help determine the appropriate balance. The best people to determine this matter are the participants in conjunction with the regulator.”
Maker taker
Citing an earlier report from ASIC, ASX also called for maker-taker pricing tariffs, which incentivise liquidity providers with rebates and charge liquidity takers, to be banned.
“Maker-taker fees can create pricing inefficiencies and distortions,” read the ASX submission. “These issues arise because the maker-taker model provides incentives irrespective of the size of the order and because the financial incentive is targeted at one side of a trade only. ASIC should not be persuaded that its existence elsewhere provides a satisfactory reason for permitting it in Australia.”
Fowler at Chi-X Australia, whose sister trading venue Chi-X Europe employs a form of maker-taker pricing, said his firm was “very much supportive” of the fee regime.
“We don't share the views of ASX [on maker taker pricing] and we'll probably gather a response to the comments made by ASX,” he said.
The ASIC paper also presents two options for creating a consolidated post-trade data source, including selecting a single provider chosen by an ASIC tender process or allowing ASIC to choose a selection of competing providers.
Chi-X Australia said it supported ASIC's intention to create a consolidated tape, noting that it would enable competing venues and provide a key reference tool for the industry. From the two approaches suggested, Chi-X endorsed an approach that encourages competition between data vendors.
But ASX called for ASIC to revisit its plans for creating a consolidated tape.
“ASIC has not presented any evidence of market failure in Australia that would warrant regulatory intervention in the form of a mandatory consolidated tape,” read the ASX response. “There is currently no factual basis for concerns that Australian market users will be unable to obtain consolidated trade information ”easily'.”
Framework for competition
CP-145 also contained proposals to introduce mandatory testing and continuous monitoring for algorithms, and pre-trade risk controls at the trading venue level. Liquidnet and ASX agreed with both proposals, while Chi-X considered it “artificial and unnecessary to create a new framework unique to algorithms that are fully integrated with automated trading systems”, and called for matters related to direct electronic access to be covered in a separate consultation.
Noting that he was “pleased” with the attention given to issues that relate to the entrance of competitive trading venues in the consultation, Fowler said he was hopeful that ASIC would soon set a date that would allow Chi-X Australia to commence operations.
While it has been granted a licence to operate in principle, Chi-X will have to await the outcome of the ASIC consultation before setting a firm launch date.
“We have been pushing quite hard for a timetable to be released,” said Fowler. “In essence, we're not just pushing on our own behalf, but for the industry because at the end of the day, it is no good if we're granted a licence and the participants and the rest of the industry aren't ready. In discussion with participants, they probably need four to five months advance notice to ready themselves in preparation for our launch.”