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12-290MR ASIC makes key announcements on market structure, dark liquidity and high frequency trading

Wednesday 21 November 2012

ASIC has made new market integrity rules to address risks emerging from developments in market structure, including growth in automated trading and the changing nature of dark liquidity.

ASIC Chairman Greg Medcraft said the rules represent an appropriate policy and regulatory balance. ‘Developments in trading and market structure domestically and abroad are rapidly shifting the landscape of the Australian market, and we see a trend towards more frequent, smaller trades, away from public markets, with implications for the price formation process,’ he said.

‘The rules, the result of industry consultation dating back to 2010, address issues ASIC considers necessary to maintain fair, orderly and transparent equity markets.’

The rules will be phased in over an 18-month period.

High-frequency trading

Rules which respond to the growth in high frequency trading (HFT) include:

Dark liquidity

ASIC’s rules on pre-trade and post-trade transparency requires meaningful price improvement and a tiered threshold for block trades (both applicable six months from registration). A rule requires market operators and participants to have in place systems and controls ensuring validation and verification of trades relying on the pre-trade transparency exception and/or post-trade delayed publication (applicable the day after registration).

A rule of enhanced data for supervision goes to the heart of market integrity and requires additional data on orders and/or trades including identification of crossing systems, flagging whether a participant is acting as a principal or agent, a client identifier or reference, identification of intermediary of Australian financial services licence holders, and whether a trade for a wholesale client was done through direct market access. For market operators, this rule applies from 28 October 2013. For market participants, the rule applies from 10 March 2014.

Dark liquidity and HFT taskforces

ASIC has established two taskforces to consider these key areas further. Both taskforces promote market integrity by identifying and taking actions against possible misconduct in the dark and through HFT. They are both reviewing the impact of these activities on market quality. The dark liquidity taskforce will consider the delivery of efficient price formation, informing investors about how their orders are executed, and promoting confidence in the integrity of the market. The HFT taskforce will analyse the prevalence, nature and impact of HFT in our market and abroad, and assess whether the current framework is adequate for HFT. Further details about the dark liquidity and HFT taskforces

Both taskforces are undertaking a thematic review and information gathering stage, which includes sending questionnaires to relevant participants and conducting meetings with industry. The analysis conducted on this intelligence, together with consideration of international developments, will inform ASIC on whether new rules, guidance, or law reform are required.

Any changes ASIC proposes will not occur without industry consultation.

ASIC also welcomes the Minister's announcement that Treasury will be conducting a review of Australia’s financial market licensing regime. This is an opportunity to consider how to best cater for the dynamic and evolving types of trading venues in Australia, now and into the future. ASIC will discuss its views with Treasury, taking into account information gathered from its taskforces.



ASIC’s consultation on the new rules included Consultation Paper 145 Australian equity market structure: Proposals (CP 145), Consultation Paper 168 Australian market structure: Further proposals (CP 168), Consultation Paper 179 Australian market structure: Draft market integrity rules and guidance (CP 179), and Consultation Paper 184 Australian market structure: Draft market integrity rules and guidance on automated trading (CP 184).

View the market integrity rules amending instruments
View ASIC’s market structure webpage for latest developments
View the Minister’s statement

Attachment to media release – Dark liquidity and high frequency trading taskforces

In July, ASIC established two internal taskforces to undertake thematic reviews of issues related to dark liquidity and high frequency trading (HFT). The core aim of these taskforces is to deepen ASIC’s understanding of the impact of these developments on market integrity and quality, and where appropriate, make recommendations to address any problems identified. Both taskforces will also consider any evidence of non-compliance with the market integrity rules or the Corporations Act, and to this end, ASIC may take action against breaches.

The first step has been to deepen ASIC’s understanding of the issues. The taskforces have been engaging with stakeholders through bilateral meetings, presentations and questionnaires. The dark liquidity taskforce has issued formal requests to crossing system operators to produce information under the Corporations Act on matters such as the nature of crossing systems, conduct, conflicts of interest and disclosure to clients. A number of roundtables with market participants on HFT are scheduled for 22 November 2012. There have also been discussions with overseas regulators, market operators and investors to understand global developments.

The next step is for ASIC to analyse the problems that have been identified and to formulate options and recommendations. While ASIC is still in the fact-finding first step, an indication of the types of options being considered, or likely to be considered, include:

As always, ASIC will consult on any recommendations with industry before proceeding with rule changes or law reform. The taskforces intend to publish their findings and recommendations in Q1 2013. ASIC expects to advise the Minister on any subsequent rule proposals in Q2 2013.

Background to attachment

Dark liquidity taskforce

The purpose of the taskforce is to promote:

The taskforce is:

HFT taskforce

The purpose of the taskforce is to promote:

The taskforce is:

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