Australian Regulator Worried about Flash Crash Events & Leverage

The latest batch of product intervention powers are likely to focus on big risks to retail investors

After the dust from the slew of announcements made by the Australian regulator over the past couple of weeks has settled somewhat, it is worth noting a stance that was little discussed. In a recent conference in Sydney, the ASIC’s senior executive leader for market supervision, Calissa Aldridge shared some views that are reflecting the watchdog’s stance towards retail brokers.

Connecting excessive market moves with leverage is not something surprising, but might be a first from a regulator. While the focus of the European regulators has been on delivering a clear and simple message that retail clients are losing too much money while trading, the ASIC’s focusing on a specific issue – the structure of markets and “ridiculous leverage.”

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ASIC’s Focus on Leverage

The regulator’s representative, Calissa Aldridge spared little words to describe the issues for the Australian brokerage industry. Calling out brokers on the “ridiculous leverage” is only one part of the problem. The underlying markets structure has been another concern for the regulator.

Apparently well aware of the changes to the trading landscape over the past several years, the regulator highlighted that risks of flash crash events are greatly underestimated by the industry. With the adoption of a more algo-centric approach to trade the markets, fragmentation of liquidity has resulted in some quite distressful events.

Aldridge stated that “routinely seeing 500-to-one leverage” on offer is not appropriate for unsophisticated retail investors. The ASIC’s point might as well be amplified since there are very few institutional investors who are using similar levels of leverage.

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Wholesale Clients & Flash Crash Events

While the ASIC’s classification of retail and wholesale clients is tied to the size of market exposure, the regulator has recently highlighted that brokers should not be using position sizes to determine the suitability of a client to be classified as wholesale. Instead, the firms have been encouraged to consider the nominal capital on the trader’s account balance to be at least $500,000.

On flash crash events, Aldridge stated that she thinks further events of this type should be expected across all markets. Such events “have real consequences not just for wholesale markets but for retail markets,” she elaborated.

With all said and done, the regulator didn’t have the power to ban different products before the vote in Australian parliament that granted to the watchdog product intervention powers. Just what is the scope of those powers remains unknown and widely disputed.

Commenting on the products offered to retail investors in Australia, Aldridge stated: “These products are highly risky. We have seen lots of examples of retail investors losing significant sums of money and we are really trying to target this on a range of fronts.”

The ASIC’s representative promised the audience that as soon as the regulator gets its new powers, there would be a consultation. As we have seen in recent weeks, however, the Australian watchdog wasted no time with such formalities and instead aggressively demanded some information from local brokers.

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