ASIC Refines Dark Liquidity, High-Frequency Trading Rules

Greg Medcraft ASIC chairman

Greg Medcraft ASIC chairman

ASIC has refined its proposed rules on dark liquidity and high-frequency trading.

The rules follow extensive consultation with industry (refer: 13-052MR).

As previously flagged*, ASIC will not go ahead with proposals to rest small orders on the market for a set time or for dark orders to meet a minimum size.

‘ASIC’s taskforces on high-frequency trading and dark liquidity, and earlier work over the past two years, has seen an improvement in the awareness of these areas of trading, hence the move not to proceed with some rules at this time,’ ASIC Commissioner Cathie Armour said.

‘Today we are announcing our direction for the full suite of proposals and we are confident they will maintain the quality, integrity and fairness of the Australian market.’

Summary of rule changes

Dark liquidity
On minimum size thresholds and tick size reform – not proceed with these proposals at this stage. Instead, ASIC will monitor the impact of the new meaningful price improvement rule that was approved by Minister Shorten in November 2012 and commenced on 26 May 2013. There has already been a decline in the volume of dark liquidity as a result of this rule.
On crossing system transparency and disclosure – proceed with the rules but allow disclosure of fees and order types to clients only and not require publication of aggregate statistics. Rely on existing rules to disclose crossings on trade confirmations for retail clients, rather than introducing a new rule. Flexibility will be provided for flagging the ‘crossing system’ and ‘as principal’ on trade information for wholesale clients.
On crossing system fair treatment – proceed with these rules, but without a fee constraint on client opt-out.
On crossing system monitoring and record keeping – not proceed with the enhanced record keeping rule. Proceed with the monitoring rules but clarify that it relates to a crossing system operator’s procedures, and should be proportionate to the nature and size of the business, and not necessarily be real-time.
On crossing system controls – proceed with rules requiring that all crossing systems comply with core existing requirements for automated order processing, and proceed with requiring notification to ASIC and impacted clients of system outages.
On T+3 course of sale reports – proceed as proposed.
On enhanced conflict of interest obligations – proceed with the rules to protect client information (with carve outs for client consent) and to prevent intentional interposing between client orders. Not proceed with requiring client orders to receive time priority over principal orders and instead amend the existing rule on fairness and priority in dealing so it applies to crossing systems.
On payment for order flow – modify our approach to be limited to negative commissions.
On indications of interest – introduce guidance about managing client information.

High-frequency trading
On small order resting time – given the considerable drop evidenced in small and fleeting orders, ASIC has decided to not proceed with this proposal at this time, but will continue to monitor it, and will reconsider should such orders return to problematic levels.
On manipulative trading – our proposal to remove ‘materiality’, instead to rely on the impact of any order, will not be implemented.

‘The rules allow for flexibility to maintain a competitive market regulatory model, one that can move with the increasingly dynamic nature of our markets,’ Ms Armour said.

‘Dark liquidity and high-frequency trading are now an integral part of our financial market landscape, and ASIC has confidence that the regulatory settings will ensure an appropriate and measured outcome.’

The timetable for implementing these rule changes is:
Make final market integrity rules (subject to Ministerial consent), release guidance and publish feedback report to Consultation Paper 202 Dark liquidity and high-frequency trading: Proposals (CP 202) July/August
Final rules take effect Staggered over 9 months

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