Dark liquidity and high frequency trading in Australia by ASIC
The Australian Securities and Investments Commission (ASIC) is Australia's corporate, markets and financial services regulator. An independent government body, its priorities are to ensure confident and informed investors and financial consumers, fair and efficient financial markets, and efficient registration and licensing.
In mid-2012, ASIC established two internal taskforces to consider the impact of dark liquidity and high-frequency trading (HFT) on the quality and integrity of Australia's financial markets. HFT and dark liquidity continue to be the subject of significant public comment across the globe, and in Australia, have developed on the back of structural, behavioural and technological changes in its financial markets.
Such advances in technology have meant that Australia's markets – like that of its overseas counterparts - have become increasingly automated and innovative. Rather than orders being generated and executed manually, most orders are now generated and executed by computer programs running algorithms, otherwise known as algorithmic trading.
Technological advances have also made it easier for trading to take place away from exchange markets, and have facilitated increased dark trading venues, commonly known as 'crossing systems' or dark pools'.
In considering these issues, the focus of ASIC's taskforces remained on the interests of listed companies, fundamental investors and Australia's competitiveness as a regional financial centre.
On HFT, ASIC found that some of the commonly held negative perceptions about it were not supported by its analysis, and that most issues can be dealt with by existing regulations. While HFT trading strategies – like other algorithmic strategies – were found to create 'noise' in our financial markets, Australia's robust regulatory framework has helped to keep it manageable. ASIC also found that there had been a marked change in market participants' behavior during the course of the analysis being conducted by the taskforce.
In relation to dark liquidity, the taskforce found that while the volume of dark trading has remained around 25-30%, there had been a change in its nature and users, with less trading by fundamental investors on lit markets. The taskforce also found that market participant-operated dark venues are becoming multilateral and more market like. With dark trading occurring in smaller block sizes that are similar to exchange markets, it indicates the need for further controls, and regulatory gaps that need to be filled.
Both taskforces also found some evidence of potential breaches of market integrity rules and the Corporations Act. Some of these matters have been to ASIC's Enforcement team for investigation. There was also a change in behaviour as a result of ASIC's inquiries during the taskforce.
The work carried out by the taskforces is consistent with ASIC striving to make the Australian market as free from misconduct as possible. Such misconduct includes market manipulation and insider trading, as well as ensuring that market participants act in the best interests of clients, and they are adequately regulated. This is consistent with the first two of ASIC's strategic priorities.
Details of the recommendations by the taskforces can be found in Consultation Paper 202 Dark liquidity and high-frequency trading: proposals (CP 202). Broadly, the recommendations relate to:
safeguarding against dark liquidity negatively impacting prices
- improved disclosure and supervision of dark trading
- restrictions on small fleeting orders.
Further details of the specific findings and proposals to emerge from the taskforces can be found on ASIC's website. Links to the relevant documents can also be found below.