The Minister for Financial Services and Superannuation Bill Shorten has announced a package of market integrity rules that will better protect investors who use Australia’s financial markets.
The rules were developed following extensive consultation by ASIC.
The package will provide for the direct control over trading algorithms, including kill switches and new extreme trading rules in case of large price movements.
The Minister for Financial Services and Superannuation recently announced new ASIC Market Integrity Rules to address the growth in automated trading and the changing nature of dark liquidity in equities markets.
These new rules appropriately balance the need for additional regulation to address the changes in the equities markets without succumbing to the unsubstantiated hysteria that has plagued the public debate on these issues in recent months.
The two most crucial elements of the new automated trading rules relate to extreme price movements and “kill switches”.
The extreme price movement rules, which take effect immediately, require ASX and Chi-X to impose a brief trading pause in the event of an extreme price movement. This pause is intended to allow investors to reconsider positions and allow algorithms to reset in response to large price changes.
A “kill switch” requires that brokers have direct and immediate control over algorithms which are sending orders to the market through their systems. The rules require that brokers prohibit the entry of orders to the market where they “have interfered with or are likely to interfere with the efficiency or integrity of the market”.
Most of the media discussion on these new rules has suggested that they are designed to curb the activities of high frequency traders. But in reality, their scope is much broader. The rules address the potential for anomalous orders from all types of trading algorithms, not just those used in high-frequency trading (HFT). HFT is a subset of algorithmic trading that is dependent on being able to enter and amend orders at very high speed.
New rules also include a requirement that dark pools offer meaningful price improvement over the market with exemptions for block trades, and additional data reporting requirements to assist ASIC in performing market surveillance.
The market integrity rules would provide for an immediate obligation on the market operators – the Australian Securities Exchange and Chi-X – to enforce an extreme trading range for trades in securities, in addition to new data reporting requirements on operations from 2013.
While the market integrity rules are a good start, stakeholders advised there were additional issues that needed to be considered, and as a result, ASIC has also launched two task forces focused on dark liquidity and high-frequency trading. They are due to report to the government in March 2013.