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ASIC makes key announcements on market structure, dark liquidity and high frequency trading
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.
Rules which respond to the growth in high frequency trading (HFT) include:
volatility controls for extreme price movements – amending the existing anomalous order threshold and extreme cancellation range rules (applicable the day after registration of the rules), and extending the rules to the ASX SPI 200 index futures contract to minimise cross-product contagion (applicable in 18 months), and
automated trading – tightening rules to require direct and immediate control over filters and orders, and amending existing rules requiring annual review of systems (applicable 18 months after registration).
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.
updated Regulatory Guide 223 Guidance on ASIC market integrity rules for competition in exchange markets (RG 223), to give guidance on the draft new or amended market integrity rules for extreme price movements, enhanced data for market surveillance, pre-trade and post-trade transparency
an addendum to Regulatory Guide 172 Australian market licences: Australian operators (RG 172) to give guidance on systems and controls for holders of an Australian market licence
Regulatory Guide 241 Electronic trading (RG 241) on the new rules relating to automated order processing, consolidated with the updating of guidance which is currently contained in ASX guidance notes, and
Report 311 Response to submissions on CP 179 and CP 184 Australian market structure: Draft market integrity rules and guidance (REP 311).
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).
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:
for dark liquidity, whether the minimum order threshold for dark trading should be increased from $0; enhanced conflict management controls; rules for trade monitoring; and enhanced disclosure by crossing system operators to clients, and
for HFT, reconsidering order to trade ratios; minimum order size; and a review of tick sizes.
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:
market integrity by appropriately regulating dark pools, ensuring participants act in the best interests of clients and taking appropriate action for misconduct occurring 'in the dark', and
market quality by delivering efficient price formation and investors who are well informed about how their orders are executed and have confidence in the integrity of the market.
The taskforce is:
continuing ASIC’s analysis of the prevalence, nature and impact of different forms of dark liquidity in our market and abroad, including assessing whether dark liquidity has impacted the efficiency of capital raising and/or willingness of fundamental investors to invest
reviewing the existing regulatory framework for dark pools, and considering if new rules are necessary. ASIC expects this work will also inform the Government’s review of the market licensing regime
reviewing conduct in dark pools (including trading by HFTs) and other trading done off-market for compliance with the rules. We will take appropriate action for identified breaches
considering whether incentives beyond meaningful price improvement are required to foster price discovery
reviewing the extent of payment for order flow and facilitation in our market and the impact on outcomes for clients. We will take action if we identify misconduct, and
assessing clearing and settlement risk of dark trades.
The purpose of the taskforce is to promote:
market quality by analysing the prevalence, nature and impact of HFT in our market and abroad and drivers for growth, and
market integrity by identifying and taking action against high frequency traders for non-compliance with market integrity rules and the Corporations Act.
The taskforce is:
considering whether the current regulatory framework is equipped to deal with the anticipated continued expansion of HFT
identifying misconduct through HFT. We will take appropriate action if we identify breaches
assessing whether high frequency traders benefit to the detriment of investors and other market users, and
seeking to better understand HFT, and define behaviours that are not in accordance with fair and efficient markets. In doing so, the taskforce is:
considering the nature of trading by high frequency traders, their impact on price formation, and assessing whether there is a systemic risk present with HFT’s capacity to withdraw quickly from the market
assessing algorithms employed by high frequency traders and whether certain types of trading/strategies should be prohibited, and
considering whether existing misconduct provisions capture inappropriate activities and behaviours of HFT. We will propose new rules on manipulation if that is thought necessary.