The Financial Services Council (FSC) and Stockbrokers Association of Australia have welcomed a consultation paper on high-frequency trading (HFT) and dark pools.
The Australian Securities and Investments Commission (ASIC) yesterday announced CP 202 - Dark liquidity and high-frequency trading: Proposals, following on from two ASIC taskforces.
The HFT taskforce found public concerns over HFT "appear to have been overstated" and can be attributed to the increasing use of trading technology by investors generally, ASIC stated.
The taskforce found no systematic manipulation or abuse of markets by high-frequency traders, and many issues can be dealt with by existing regulations, ASIC stated.
Dark trading market participant Liquidnet also welcomed ASIC's collaborative approach and said the recommendations "preserve the appropriate protections for institutions seeking to execute large block orders in dark venues".
High-frequency trading in Australia is dominated by a small group of entities, with the 20 largest entities accounting for about 80 per cent of all HFT turnover. Order-to-trade ratios in Australia are moderate compared to overseas markets and the average holding time is much higher - at around 42 minutes - rather than seconds, according to ASIC.
"High-frequency trading strategies - like other algorithmic strategies - can create 'noise' in our financial markets through small orders and trades. We are making some suggestions to moderate this activity," ASIC stated.
The dark liquidity taskforce found that while the volume of dark trading has not increased (remaining at around 25 per cent to 30 per cent of trading), the composition of dark liquidity and market participant-operated dark venues (crossing systems) has changed significantly.
There are now 20 crossing systems operated by 16 market participants and they have started to connect to one another, ASIC noted.
The regulator said it "uncovered some practices that require further controls and there are regulatory gaps that need to be filled".
Both taskforces found potential breaches of Market Integrity Rules and the Corporations Act, and some matters are being investigated.
The proposals sought to establish a minimum size threshold for dark orders and enforce new and amended Market Integrity Rules and issue guidance for market participants who operate a crossing system.
The regulator also proposed to issue new and amended Market Integrity Rules and/or guidance to address excessive messaging and market noise (in particular, small and fleeting orders and order-to-trade ratios), and manipulative trading.
The FSC described the consultation as a "sensible approach" which it said will strengthen governance and oversight in the sector.
"It is critical that any new regulations focus on retaining liquidity and stability to ensure Australia remains attractive as a capital raising destination," said FSC chief executive John Brogden.
HFT and dark pool should not be seen as a threat, he said, adding that industry consultation would help ensure that the regulator is well briefed on the issues and that any new regulations are cost effective and retain operational efficiency.
The FSC pointed to research (conducted by Baseline Capital) which it released last year showing Australian capital markets have not been adversely impacted by high-frequency and dark pool trading to the same degree as markets in other countries.
The Council said it will be doing further research on high-frequency trading and dark liquidity to assess the effectiveness of the levers used for trading in these markets.
The Stockbrokers Association said it had been concerned for some time that HFT and dark trading issues have affected confidence in the market among both participants and buy-side institutions.
"While some of the concerns that are held are very real, there has also been an excessive degree of emotion, which is not conducive to a rational analysis of the issues," the association stated.
Managing director and chief executive of the Stockbrokers Association David Horsfield commended ASIC and the taskforces for the "professional way in which they have consulted with the market and gone about their work".
It is vital that market quality on the lit markets be maintained, and it is good to see that ASIC is proposing ways to ensure the appropriate regulation of dark trading venues, he said.
