Australia Sets New Rules on HFT and Dark Liquidity

Australia’s financial markets have been relatively slow to embrace the mighty world of high frequency trading, the country’s main financial regulator, ASIC has been keen to act as a guide and give the market a balanced view on the ultra fast trading style. In its latest announcement the authority has released eight new rules for participants on dark Liquidity and high frequency trading.

In short, the rules have been drafted to add a layer of transparency to the market, for example one ruling for dark liquidity states; from the 10th of November if suspicious activity is identified in a crossing system, it must be reported to ASIC. In addition, the rulings want to eliminate malpractices and ensure the markets operate in a clear, fair and efficient manner.

"The final rules follow extensive internal analysis and consultation with industry and will improve the transparency and integrity of crossing systems and strengthen the requirements for market participants to deter market manipulation," ASIC Commissioner Cathie Armour said in the official press briefing.

New rules:

Dark liquidity

• Crossing system transparency and disclosure – crossing system operators must publish on a website information about their crossing system (e.g. products traded) (from 10 November 2013). They must make disclosures to clients on the operation of the crossing system (from 10 February 2014). They must identify in trade information for wholesale clients the crossing system and whether they traded as principal (from 9 May 2014). Crossing systems will also be publicly identified in course of sale reports.
• Crossing system fair treatment – the tick sizes that apply to Exchange markets will also apply to crossing systems (from 10 November 2013). Crossing system operators must have a common set of procedures which do not unfairly discriminate between users (from 10 February 2014) and allow clients to opt out of using their crossing system (from 10 November 2013).
• Crossing system monitoring – if suspicious activity is identified in a crossing system, it must be reported to ASIC (from 10 November 2013). Crossing system operators must monitor activity on their crossing system from 10 November 2013. These will apply from 10 May 2014.
• Crossing system controls – existing system and control requirements for automated order processing will extend to crossing systems (from 26 May 2014) and crossing system operators must notify users and ASIC about system issues as soon as practicable (from 10 February 2014).
• Enhanced conflict of interest obligations – market participants must protect confidential client information (from 10 February 2014) and deal with client orders fairly and in due turn (from 9 February 2014).
• Order flow incentives – market participants will be prevented from receiving negative commissions (from 10 February 2014).

High frequency trading

• Manipulative trading circumstances of order – market participants must consider additional circumstances in considering whether a false or misleading market has been created; the frequency with which orders are placed, the volume of products that are the subject of each order and the extent to which orders made are cancelled or amended relative to the orders executed (from 9 February 2014).
• Manipulative trading rules harmonised – market participants of the ASX 24 market will need to comply with new requirements to prevent manipulative trading, the same as currently apply to the ASX and Chi-X markets (from 9 February 2014).

HFT and dark trading venues have been under scrutiny as politicians and practitioners have blamed the approach for malpractices. Germany’s BaFin has implemented new rules that are causing a distress to the market putting pressure on operators. On the other hand, Australia's approach has been fair but welcoming and the latest rules highlight ASIC’s commitment to ensuring Australia is ahead in its bid to attract high frequency traders.

The new rulings are expected to be rolled out over the next 12 months. Ms Armour concluded: “‘We expect the new rules will quickly lead to changes in the behaviour of market participants, building on the positive changes we have already seen with other recent rule changes and the work of ASIC’s taskforces on dark liquidity and high frequency trading.”