ASIC Consults on Equity Market Structure Regulatory Framework
ASIC on November 4 released a consultation package on enhancing regulation of Australia’s equity markets, including the introduction of competition between exchange markets. The consultation package includes an overview summary document (this reproduces Part 1 of the consultation paper), a detailed consultation paper, draft market integrity rules and a supporting economic report on equity market structure.
Consultation Paper 145 Australian equity market structure (CP 145) and our report on the Australian equity market structure (REP 215) reviews recent and likely trends in global and Australian equity markets including the 6 May ‘flash crash’ in the US, high-frequency and algorithmic trading and the lessons from other jurisdictions that have introduced competition between exchange markets. Equity markets globally are undergoing considerable change and they are now overwhelmingly electronic and automated.
Our regulatory response to these developments is guided by ASIC’s high level priorities to: build confidence in the integrity of Australia’s capital markets; protect retail investors; and facilitate international capital flows. The specific proposals in the Consultation Paper are designed to support our objectives related to market quality, market integrity, investor protection, fairness and efficient implementation of changes to the regulatory regime.
Specifically CP 145 covers:
* new controls to curb extreme price movements and to require transparent cancellation arrangements – our response to the ‘flash crash’
* enhanced controls for direct electronic access and algorithmic trading – in response to the increasingly pervasive role of technology
* formal obligations on market participants – to deliver best execution to clients
* minimum disclosure about order and trade information – to promote efficient price formation on markets and reduce incentives for trading to shift to ‘dark pools’
* consolidation of market data across all execution venues – to ensure whole of market transparency
* market operator cooperation on trading halts and related matters
* better regulatory data on orders and trades – to ensure ASIC’s market supervision keeps pace with market developments.
A summary of ASIC’s proposals is below.
ASIC Commissioner Mr Shane Tregillis said, ‘Technology and competition are fundamentally changing the way our equity markets operate. Our proposed regulatory framework is intended to maximise opportunities for market efficiency and innovation while minimising any risks to investor confidence in our markets. As overseas experience has demonstrated, it remains essential that investors and companies have confidence in our equity markets as efficient places to raise capital and where secondary trading is fair, orderly and transparent.’
Mr Tregillis said, ‘ASIC appreciates market participants will need time to adapt to the new environment. We will be engaging closely with industry in developing the proposed regulatory framework and systems to support competition in the Australian market. We aim to be ready to implement competition as soon as practicable in 2011, when the necessary framework is in place and the market is ready.’
The market issues raised by the ASX and Singapore Exchange merger implementation agreement are distinct from those addressed in the consultation paper, and the merger proposal will be subject to various government, regulatory and shareholder approvals. For these reasons, the consultation paper does not deal with issues associated with those approvals. However, the regulatory framework set out in the consultation paper will apply to all operators offering trading in equity market products, and participants operating in Australia.1
The deadline for feedback on ASIC’s proposals is 21 January 2011. As part of the consultation process, the Australian Financial Markets Association, the Stockbrokers Association Australia and Financial Services Council have agreed to host ASIC information sessions in mid-November for their memberships. Further details will be provided by the associations to their members.
Summary of ASIC’s equity market structure proposals
|Proposals in response to recent and likely market developments|
|Extreme price movements||A market operator must have:
Ÿ capability to automatically suspend trading in a single product and market-wide; and
Ÿ transparent and predictable arrangements for cancelling trades.
|Direct electronic access (DEA)||A market participant must ensure DEA clients meet certain standards and should have a contract in place governing the market access arrangements. The market participant must have adequate controls (pre-trade filters) and capacity to disable clients’ access.|
|Algorithmic trading||A market participant must ensure that all systems used to generate orders by it and its DEA clients are appropriately tested, monitored continuously and have a ‘kill-switch’.|
(also needed for competition)
|A market participant must take reasonable steps to obtain the best total consideration (may be interpreted as ‘price’) for clients. Professional clients and clients transacting in sizes of $500,000 or more may nominate other objectives. Market participants:
Ÿ should review the arrangements at least annually;
Ÿ should disclose to clients the venues on which client orders may be executed. We are considering whether, for a transitional period, we should explicitly enable participants to meet best execution solely on ASX;
Ÿ should ensure incentives and bundled services do not adversely impact execution;
Ÿ must be able to demonstrate compliance with their execution arrangements; and
Market operators should publish statistics about execution quality on their venues.
(also needed for competition)
|A market participant must display orders on a pre-trade transparent market unless the order is large in size, is equal or greater to $20,000 and there is price improvement, for undisclosed orders on a pre-trade transparent market, the size is equal or greater than $20,000 or where done outside the normal trading hours of all markets.
A market operator must make pre-trade information available continuously.
Operators of dark pools must periodically report to ASIC on the nature and activity of trading on the pool. This will enable ASIC to monitor developments.
|Market integrity measures||A market participant must:
Ÿ distinguish on orders and trade reports short sales; and
Ÿ for OTC transactions, flag on trade reports the identity of the venue (for ASIC only).
We are considering whether market-wide unique identifiers are necessary.
|Proposals in response to competing exchange market operators in Australia|
|Post-trade transparency||A market participant must immediately report all trades to a market operator, subject to delay for large facilitated trades. The executing or selling party should report.
A market operator must publish the information immediately, subject to the delay.
|Consolidation of market data||We intend to bring about an outcome of consolidated information being available to market users. We are considering a number of options: see Section K of CP 145.|
|Cooperation||A market operator must comply with a multimarket protocol. The protocol will govern arrangements relating to trading halts and suspensions, and sharing of information.|
|Clocks||A market operator must synchronise its clocks to a clock nominated by ASIC.|
|Identifiers||A market operator must use common participant identifiers and stock symbols.|
|Tick size||A market operator must implement common tick sizes (existing ASX tick sizes).|
|Trades under market rules||Market participants must not transact by means other than under the rules of a market operator, subject to certain exceptions.|
|Trading during a trading halt||A market participant must not trade on-order or off-order book during a market integrity related trading halt or suspension.|
|Trade confirmations||If a single client order is executed in multiple fills and potentially across multiple markets, a market participant may aggregate the details into a single confirmation.|