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Reasoned rules with an all-seeing eye

Amongst the conjecture and cajoling by financial markets participants keen to further their interests in regulatory debates, hard evidence of how regulatory change affects the market is often obfuscated if relevant stats exists it all. But, could a new, all-seeing tool empower rule makers to avoid the errors of others?

The team at the Capital Markets Cooperative Research Centre (CMCRC) in Australia has developed a data aggregation tool that shows the impact of regulatory and technology changes on a range of market performance metrics for 25 equity markets globally.

The Market Quality Dashboard has a simple focus – to help regulators craft rules that foster efficient and fair markets. Its creators hope it will remove the noise around issues such as high-frequency trading and dark pools and let the data speak for itself.

The other benefit will be to let regulators learn from the mistakes of their peers.

In an instructional video posted on YouTube, Michael Aitken, CEO of CMCRC, pinpoints the impact on market performance of the arrowhead upgrade implemented by the Tokyo Stock Exchange in January 2010, which caused an immediate dip in trading activity but not a corresponding dip in prices.

He says the tool can measure factors like the impact of short-selling rules and changes to minimum tick sizes by looking at over 50 different metrics.

Such a tool stands a chance of empowering regulators and industry bodies to press for more acute, defined rule changes based on how such tweaks have affected markets in other regions.

In a snipe at the Securities and Exchange Commission, Aitken cites the US regulator’s new MIDAS system (launched last year) that was designed to monitor market activity and create actionable data for public use, as missing the point about market fairness by using a small universe of metrics.

For participants too, there will be value in this. Measuring the impact of new rules, market infrastructure upgrades or greater competition amongst venues will help buy- and sell-side firms to better adjust their trading operations and strategies in advance.

After five years and several million dollars of Australian government funding specifically for this, hopefully it will address the catch-cry of participants globally, which Aitken repeats: “Too many changes are being made to markets without any evidence base.”