Australian Regulators Get It Right


A new report released by the Australian Securities & Investment Commission (ASIC) titled “Dark Liquidity and High Frequency Trading” has been causing a stir.  If you read some of the headlines, you may think that this report gives the seal of approval to HFT.  But as we always do here at Themis Trading, we read the actual report and not just the headlines.  We also checked in with our friends in Australia to get their read on the report.

The report was produced by two separate taskforces (Dark Liquidity and High Frequency Trading) that were established by ASIC in mid 2012.  The high frequency trading taskforce seems to be garnering the most headlines because of this finding:

“Some of the commonly held negative perceptions about high frequency trading are not supported by our analysis of the Australian markets.”

They found that in Australia there was only a moderate increase in order-to-trade ratios and that holding periods were not that short (only 1.2% of HFT hold trades for two minutes or less).  We don’t dispute their findings at all but would like to point out the reason for these findings.  We believe the Australian regulators and institutional trading community have observed the havoc that HFT caused in markets like the US and Europe and were determined not to foster a breeding ground for HFT.  Will Psomadelis, head of trading for Schroders Investment Management in Australia, told us:

What seems to be missed is that the reason why HFT is nowhere near the problem it could be is that regulations such as the fee recovery and the avoidance of a Reg NMS style trade through rule, coupled with the subsequent backlash against fragmentation by the buy side (i.e. most dont preference chi x ) based on credible research,
has substantially reduced its impact.

Even though HFT is not as pervasive in Australia as it is around other parts of the globe, the HFT taskforce is remaining vigilant.  They found that “the ‘noise’ of excess messages and small fleeting orders is disruptive to the market and has damaged investor confidence“.  They are recommending a 500 millisecond resting time for small orders.

The Dark Liquidity taskforce, however, found many troubling issues surrounding dark pools or crossing systems.  We recommend that you look at pages 7 through 9 of the report for their findings, conclusions and recommendations. The taskforce is proposing possible minimum trade sizes, more stringent disclosure rules for crossing system operators, better monitoring, no discrimination between users, opt-out ability and the prevention of cash payments for order flow.  In addition to these, Australia has already passed a new dark liquidity price improvement rule which will go into effect on May 26, 2013.   Another disturbing finding from the Dark Liquidity Taskforce was that there is considerable principal trading going on in crossing systems. They found that 8 out of 20 crossing systems conducted principal trading and that trading represented 38% of the value traded on these crossing systems.

Overall, the ASIC report is a well-documented and excellent analysis of equity trading in Australia.  The fact that this report was produced by two taskforces that were assembled less than a year ago should cause the SEC to take note.  Who knows, maybe the ASIC report will even motivate the SEC to dust off their Dark Pool Regulatory proposal that they have had sitting on the shelf for over 3 years now?