ASIC Reports On Dark Liquidity Rules
ASIC on 19 May released the results of a review of rule changes affecting ‘dark trading’ and their impact on market quality.
The meaningful price improvement rule and changes to block tier thresholds were introduced in May 2013, following an ASIC taskforce set up to examine the impact of dark liquidity on Australia’s financial markets.
ASIC’s review indicates the trends in dark liquidity that were of some concern have discontinued. Report 394 Review of recent rule changes affecting dark liquidity (REP 394) shows:
- fairness issues associated with below block size dark orders stepping ahead of lit orders have been addressed
- the bid–offer spread is more equitably distributed between parties executing below block size dark trades
- the meaningful price improvement rule and change in block tier thresholds has not affected bid–offer spreads, and
- participants can now trade smaller blocks away from lit markets where they would have traditionally faced higher market impact costs.
ASIC Commissioner Cathie Amour said the results supported the changes made in 2013, ‘We saw bid–offer spreads widen during 2013. However, the widening in spreads was driven by increased volatility at the time. After controlling for factors that are known to affect spreads (trading activity and volatility), there has been no material change. Therefore, the meaningful price improvement rule and change in block tier thresholds has not affected bid–offer spreads.
‘We are satisfied the current policy settings and rule framework has had the desired effect of improving fairness and addressing the concerning trend of increasing below block size trading and declining block size trading. We do not propose to change the current policy and rules on dark liquidity, but will continue to monitor market developments.’
To examine the impact of the rule changes, ASIC:
- reviewed concerning trends identified in Report 331 Dark liquidity and high-frequency trading (REP 331) to determine whether they had responded to the rule changes as anticipated, and
- provided detailed market data to Charles Lane Advisory Pty Ltd, a market microstructure expert, to conduct a robust empirical analysis of the rule changes on market efficiency.