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Australia Introduces New Rules On High Frequency Trading

by Mary Swire,, Hong Kong

23 November 2012

The Australian government has announced a package of market integrity rules for high frequency trading (HFT) and dark pools designed to better protect investors.

The rules have been developed following extensive consultation by the Australian Securities and Investments Commission (ASIC). Under the changes, so-called 'dark pools' will be required to offer meaningful price improvement over the 'lit' market, with exemptions for block trades.

So-called dark pools are a major category of alternative trading venues, which allow securities to be transacted, mainly by institutional investors, anonymously and outside traditional exchanges.

Reforms to the market integrity rules will provide for an immediate obligation on the market operators, ASX and ChiX, to enforce controls on trading ranges for trades in securities. There will be new data reporting requirements on operators from 2013, intended to assist the ASIC in performing market surveillance, and direct control over trading algorithms will be introduced, including "kill switches" to immediately stop an algorithm if required. For market participants, the obligations from the market integrity rules will come into force over a six to 18 month period.

In spite of these reforms, the government admits that stakeholders have raised concerns that there remain issues that need to be considered. In July, the ASIC established two internal taskforces to undertake thematic reviews of issues related to dark liquidity and HFT. The aim is to deepen the ASIC's understanding of the impact of these developments on market integrity and quality, and where appropriate, make recommendations to address any problems identified. These taskforces are due to report to the government in March, 2013.

The Treasury has also been requested to conduct a review of Australia's financial market licensing regime. The review will examine the licensing of dark pools, but will additionally be directed at ensuring that the market licensing regime is generally fit for purpose.

"I want to ensure that the licensing framework arrangements under the Corporations Act are appropriate so that ASIC has the best possible tools to supervise and regulate both the more traditional public exchanges and more recent developments. The government also seeks a system that is adaptable as new markets and ways of trading develop," said Bill Shorten, Minister for Financial Services and Superannuation.

TAGS: investment | law | equity investment | Australia | licensing | stock exchanges | regulation

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