Australia's Securities and Invesment Commission is consulting on changes to its market integrity rules amid fears that AI combined with algorithmic trading could enhance market volatility and exacerbate flash crashes.
Market participants’ systems used for trading, order management and surveillance are now largely automated. Asic estimates that algorithmic trading in Australian listed equities markets comprises approximately 85% of all trading, while in the futures markets about 94% in SPI 200 futures trading and 46% in three-year Treasury bond futures trading.
The watchdog says that during periods of heightened volatility, financial markets may be especially vulnerable to risks from unexpected activity by trading algorithms or AI. Risks may be increased where AI is deployed with algorithmic trading, such as potential exacerbation of market volatility or ‘flash crashes’. Also, the complexity and opacity of AI models can make it difficult to understand decision-making processes, increasing the potential for unintended consequences.
Asic’s proposed rule changes would extend the principles-based rules for trading systems to participants’ development, testing, use and monitoring of their trading algorithms and require ‘kill switches’ to enable immediate suspension of aberrant trading algorithm activity.
Asic also proposes to repeal some obsolete rules and reduce complexity as part of its focus on streamlining the MIRs, including repealing the automated order processing annual notification to Asic requirement.
The regulator is inviting feedback to the plans to be submitted by 22 October.