21 October 2014

Beware of the dark, but HFT no bogey man says Aussie regulator

18 March 2013  |  5042 views  |  3 Sydney Opera House

The potential for market abuse in dark pool trading is more profound than 'overstated' concerns about the dangers of high frequency trading, says Australia's Securities and Investment Commission (Asic).

The conclusions flow from an analysis of dark liquidity and HFT by two internal Asic taskforces in response to concerns about the impact of new trading technologies on market integrity and quality.

Asic deputy chairman Belinda Gibson says: "Companies should have confidence that share prices reflect their true value, and that they are able to efficiently raise capital. Similarly, investors should have confidence that they will be able to buy and sell shares at a fair and efficient price on an orderly market."

She says the taskforces found that public concerns over HFT appear to have been "overstated" and can be attributed to the increasing use of trading technology by investors generally.

While the taskforce did not find systematic manipulation or abuse of markets by high frequency traders, it found that their trading strategies are commonly adopted by many other algorithmic traders, including the institutions.

Gibson says that many issues can be dealt with by existing regulations, although the watchdog intends to impose restrictions on HFT firms rapidly opening and cancelling multiple batches of small orders to test market prices

It was found that high-frequency trading in Australia is dominated by a small group of firms with the 20 largest entities accounting for about 80% of all HFT turnover (or 22% of total equity market turnover).

On dark liquidity, the taskforce found that while the volume of dark trading has remained around 25-30%, the composition of dark liquidity and internal bank crossing systems has changed significantly. Asic identified 20 crossing systems operated by 16 market participants and they have started to connect to one another.

Says Gibson: "Dark trading is now occurring in smaller sizes that are similar to 'lit' exchange markets and for some securities this has influenced their price. Asic uncovered some practices that require further controls and there are regulatory gaps that need to be filled."

The latter will entail "improved disclosure and supervision" of dark trading.

"Financial markets are always evolving," says Gibson. "Electronic trading has been with us since the 1970s. It is now exponentially faster and regulation must move with it."

Comments: (3)

Neil Crammond - evoi - london | 18 March, 2013, 10:17

The regulator should really be aware how "dark pools " operate and by their failure and slowness to react have allowed the "cheetahs " to mve away from HFT and into  these pools .

  I  cannot believe that someone who makes a price may not be filled when their price trades ............ this cannot be legal !

 One would of thought that regulators would have to pass these "pools " or at least give them an  "MOT " before they are allowed to trade ? 

 HFT is a dinosaur compared to the damage "dark pools " will provide to

liquidity and volume .

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A Finextra member | 18 March, 2013, 10:32

This is a sensible and mature conclusion from the Aussie regulator. Who would have thought that Australia would bring some common sense to HFT. Dark pools are a different matter and there does need to be increased testing of use and how firms maybe detrimentally effecting markets. In short none of these issues are new having been with the markets for decades. The regulators need to move with the times and adapt rather than introduce new rules.There are already far too many rules that do more to complicate the market to the benefit of no one

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A Finextra member | 19 March, 2013, 18:12 HFT is no use to man more beast. It does not provide a mechanism for capital raisers to link with investors. They close their positions every evening adding no value to the market. Having absorbed liquidity all day. The dinosaurs are people who thinks the financial markets are still for traders. As for Dark Pools... What value do they bring to the economy again?
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