Similarly to the other 'shadow' industries, such as shadow banking, there is a high level of regulatory risk stemming from the shadow or 'white label' broking industry, said the submission.
Compared to the "highly regulated" broking industry – which operates under market integrity rules as well as exchange, clearing and settlement obligations – shadow broking has a low level of regulation, said the SAA.
Shadow broking has continued to grow strongly as a result, said the submission.
But the shadow broking sector is not completely unregulated given that it falls under ASIC's Australian Financial Service Licence (AFSL) regime, said the SAA.
"However, this regime falls well short of the compliance regime applicable to Market Participants," said the submission.
"ASIC’s supervisory program in relation to shadow brokers, or its application of AFSL licence requirements, has not been sufficiently developed to adequately supervise this sector," said the SAA.
In addition, the "true number" of shadow brokers may not be known, said the submission.
"Many members of the investing public who are clients of shadow brokers may be under the impression that they are dealing with a stockbroker and will not appreciate that this not actually the case."
"Because of this regulatory gap, the risk that the next generation of 'Storm [Financial] type regulatory failure could arise in the shadow broking sector is a significant one, unless steps are taken to apply an appropriate level of regulation to that sector," said the SAA.
