Bloomberg News

High-Frequency Trades Need Measured Rules, ASIC’s Medcraft Says

March 12, 2013

High-frequency trading in Australia’s equity markets requires a “measured response,” said the country’s securities watchdog before the release next week of a study on regulation in the industry.

“There’s no silver bullet,” Greg Medcraft, the 56-year- old chairman of the Australian Securities and Investments Commission, said in an interview March 11. “You don’t ban it, you manage it and create the right risk framework around it. We want to have a measured response.”

Australia, Hong Kong and Singapore are considering the extent to which trading strategies that rely on speedy placement of bids and offers should be regulated amid concern that they can be used to manipulate prices. Germany was the first developed market to legislate on the practice, which can profit from tiny price discrepancies.

ASIC, which last year set up two taskforces to examine the impact of high-frequency trading and dark pools on Australian equity markets, will release the results of its findings on March 18, Medcraft said. Dark pools are private venues that don’t display prices until after trades take place.

Medcraft has cited Knight Capital Group Inc. (KCG:US)’s $457 million loss in August and a May 2010 incident that briefly wiped almost 1,000 points from the Dow Jones Industrial Average as examples of the need for controls. In December, he expressed concern that high-speed trades provided “phantom liquidity” that could be quickly removed from stock markets.

‘Kill Switches’

Following consultation from ASIC, the Australian government said Nov. 20 that all automated trading programs must have “kill switches” by June 2014 to immediately disable them if they malfunction.

“We said in the first report last year, let’s make sure the algorithms are tested annually,” said Medcraft. “Let’s make sure they have appropriate filters so they don’t blow us up. We’re going to focus on predatory algos and make sure that they’re not manipulating the market.”

Financial Services Minister Bill Shorten said in November that rules governing operators of dark pools may need to be revised to reflect market developments. No decision has been made about what licensing approach should be taken, he said.

“On dark pools, generally if it looks like a market and acts like a market, it needs to have proper market regulation,” said Medcraft.

Price Improvement

New rules already announced that will come into effect in May will require trades done in dark pools to achieve a better price than public venues by at least one tick size or occur at the midpoint between bids and offers.

ASX Ltd.’s main exchange handled 67 percent of trades of shares listed on the S&P/ASX 200 Index (AS51) in February while its dark pool, Centre Point, handled 3.7 percent, according to Fidessa Group Plc. Off exchange trades, which include broker- arranged block trades and dark pool trades, accounted for 18 percent of the volume. ASX is Australia’s main bourse operator.

In the U.S., a Rosenblatt Securities Inc. report tracking 19 venues showed dark pools accounted for a record 14.3 percent of U.S. equity volume in January.

Hong Kong’s regulator has issued about 18 compliance letters to electronic trading firms, mostly due to computer algorithms that have led to price or volume disruptions, Mark Steward, executive director in the enforcement division of the Hong Kong Securities and Futures Commission, said in August. The results of a Hong Kong market consultation on electronic trading are still pending.

The practice of using computers to buy and sell securities in fractions of a second will be regulated for the first time in Germany after the lower house approved a bill requiring firms that use the electronic strategies to register with banking authorities.

“What will be interesting is our observations about algos, that essentially this is the new normal,” Medcraft said. “Supervision is important to make sure we’re watching out for market manipulation.”

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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