Greater cooperation among regulators worldwide, better engagement with market participants and the ability to learn from regulatory measures developed in the United States and Europe will give Australia a better chance of preventing short bursts of extreme volatility in the financial markets.
"For the most part, Asia has the benefit of learning from the mistakes made elsewhere and has sufficient time to put in the right safeguards," Liquidnet corporate strategy group member Vlad Khandros said.
Just over a year ago, indices on Wall Street fell hundreds of points in several minutes but rebounded sharply only minutes later.
This short burst of extreme volatility was labelled the 'flash crash' and raised questions about the risks of algorithmic and high-frequency trading.
These types of trades are still relatively new in Asia-Pacific markets and regulators here have enough time to learn from initiatives elsewhere to see what works and how it impacts on market participants.
"You can actually see regulators now consulting with other regulators and IOSCO (International Organisation of Securities Commissions). They are actually consulting with the end users, the institutions, mutual funds and hedge funds that represent billions of dollars," Liquidnet Asia-Pacific managing director Lee Porter said.
"What [Asia-Pacific markets] obviously don't have is a common regulatory framework or regulator. But I think there will be some harmonisation along the way."
Although the flash crash took place in the US, the Asia-Pacific region felt its ripples.
"While the flash crash wasn't directly related to the Asia-Pacific, it had a huge knock-on effect," Porter said.
"After the flash crash happened in the US, it created a huge amount of uncertainty in the market, a big pull back in conviction and trading in equity markets, so liquidity dried up around the world. Market events like that have a huge knock-on effect."
Australia has been considering the problem of flash crashes as part of its preparation to introduce competition in the exchange industry, with the approval of a licence for Chi-X.
"You have recently seen the publication of the market integrity rules in Australia and ASIC has taken into account a huge amount of input from the market," Porter said.
"They feel very comfortable they now have rules that cover a multi-market environment and they are ready for that when it comes out later this year."
One solution to the risk of flash crashes that is being considered in the US is the use of circuit breakers, which provide a time-out period for traders in instances of extreme price movements to give them the opportunity to reconsider their trades.
Liquidnet chief executive Seth Merrin testified before the US market regulator, the Securities and Exchange Commission, in relation to circuit breakers after the flash crash occurred and Porter said that measure could potentially work in Asia-Pacific markets as well.
"I think implementation of circuit breakers across the board does make sense," he said.
