Published On: Mon, Mar 18th, 2013

ASIC Publishes Key Documents on Dark Liquidity and High-Frequency Trading

Greg Medcraft ASIC chairman

Greg Medcraft ASIC chairman

ASIC released a report and consultation paper March 18 arising from the work of two taskforces that examined dark liquidity and high-frequency trading (HFT). In particular, the taskforces considered their impact on the quality and integrity of our financial markets.

Report 331 Dark liquidity and high-frequency trading (REP 331) and Consultation Paper 202 Dark liquidity and high-frequency trading: Proposals (CP 202) outline the findings and key recommendations of the taskforces, whose focus was on the interests of listed companies, fundamental investors, and Australia’s competitiveness as a regional financial centre. The taskforces were borne out of concern regarding overseas and local market developments about possible impacts of dark pools and HFT, including suggestions that it was to the detriment of market confidence.

The HFT taskforce found that while such trading does create ‘noise’ in our financial markets, some of the negative perceptions about HFT were found to not be justified. This includes that order-to-trade ratios were not high, but had been moderate compared to overseas markets, and were not always driven by high-frequency traders. Similarly, issues around predatory and manipulative behaviour appear to be the exception. Much of the ‘noise’ is generated by broker algorithms.

In relation to dark liquidity, the taskforce found that while the volume of dark trading remains at about 25-30%, the nature and use of such trading has changed, with less trading by fundamental investors on lit exchange markets. The growth in dark trading has led to a widening of bid-offer spreads in some securities, affecting price formation for these securities. Dark venues such as crossing systems are growing in number, and are becoming increasingly multilateral and more market-like.

Both taskforces also found some evidence of potential breaches of market integrity rules and the Corporations Act, with some matters referred to ASIC’s Enforcement area. There has already been a change in behaviour as a result of the work carried out by the taskforces.

Deputy Chairman Belinda Gibson said: ‘The work of the two taskforces has shown that while there are some regulatory gaps to be filled, the overall framework is robust, and that markets and participants are adapting to the faster pace of change.’

ASIC will hold a series of presentations in April to outline the findings, explain the proposals and receive feedback. Comments on the consultation paper are due on 10 May. We look forward to engaging with industry as we settle these proposals.

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