Bloomberg News

High Frequency Trading of High Concern, ASIC Says

October 10, 2012

ASIC Chairman Greg Medcraft

Greg Medcraft, chairman of the Australian Securities and Investment Commission (ASIC). Photographer: Ian Waldie/Bloomberg

Australian regulators are considering requiring all trading algorithms to have an inbuilt “kill switch” to immediately disable them if they malfunction, Australian Securities and Investments Commission Chairman Greg Medcraft said at a conference in Sydney.

ASIC is also mulling a mandate that any trades done through a dark pool, an off-exchange venue that doesn’t display prices or the identity of buyers and sellers, have meaningful price improvement from public platforms, Medcraft said. Australia’s latest consultation paper on electronic trading closed for comments Sept. 14. Final rules are expected this month.

Electronic trading has come under scrutiny globally after the practice was blamed for a May 2010 incident that saw the Dow Jones Industrial Average briefly lose almost 1,000 points in less than 20 minutes. An algorithm malfunction on Aug. 1 cost Knight Capital Group Inc. (KCG:US) $440 million, driving the company to the brink of bankruptcy. Traditional exchanges worldwide are losing market share to dark pools and other alternative venues.

“People are still looking for an answer on high-frequency trading,” Medcraft said. “While I know that some high- frequency trading provides liquidity, I also know that some senior bankers and fund managers have privately described it as providing phantom liquidity. The reason for that is that it’s phantom because it only stays there for a few seconds, or micro seconds.”

Lower Threshold

Regulators plan to require any trades through dark pools obtain a better price than lit, or public, venues by at least one tick size or that they occur at the midpoint between bids and offers, Medcraft said. ASIC planned to lower the threshold for block trades from A$1 million to A$200,000, he said.

In March, 16.4 percent of Australian trading went through dark pools, with an additional 13.2 percent trading in blocks of larger than A$1 million away from the exchange, according to ASIC statistics e-mailed to Bloomberg.

The smaller size of Australia’s market means it’s more vulnerable to fragmentation and off-exchange trades, ASX Ltd. (ASX), Australia’s main bourse operator, said on Aug. 6 in response to the market-structure consultation. ASX lost its monopoly as Australia’s only public, or lit, venue in October last year with the entry of Nomura Holdings Inc.’s Chi-X Australia.

Algorithmic trading mishaps haven’t been as prominent in Asia as in the more developed markets. Trading in India’s benchmark Nifty and some stocks stopped for 15 minutes on Oct. 5 after the 50-stock gauge sank 16 percent.

Erroneous Trades

The plunge wasn’t due to a malfunctioning trading program; it was caused by as many as 59 erroneous trades by a dealer at Emkay Global Financial Services Ltd. in Mumbai, the NSE said in a statement on Oct. 5. The brokerage said Oct. 8 that one of its dealers “committed a bona fide error.”

Brokers are responsible for minimizing the impact on markets when their algorithms and systems malfunction, Mark Steward, executive director in the enforcement division of the Hong Kong Securities and Futures Commission said at conference on Aug. 31. The SFC has issued 18 compliance letters to electronic trading firms, mostly due to computer algorithms that have led to price or volume disruptions, he said.

The SFC declined requests from Bloomberg to give more detail on the trade, citing confidentiality of the parties involved that were not formally sanctioned.

U.S. regulators are also mulling kill switches, or automated triggers that would turn off trading at securities firms when their volume surpassed preset maximums. A group of exchange and investment professionals recommended the measure in a letter for discussion to the U.S. Securities and Exchange Commission. Kill switches that could have stopped orders from Knight Capital on Aug. 1 may have saved the Jersey City, New Jersey-based firm millions of dollars, they said.

“We’ve taken a very constructive approach with how we analyze the market and are pretty forward thinking” on a global basis,’’ ASIC’s Medcraft said. “We are stepping up surveillance efforts, particularly focusing on high-frequency traders.”

To contact the reporters on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net; Eleni Himaras in Hong Kong at ehimaras@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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