ASIC has made new market integrity rules to address risks emerging from developments in market structure, including growth in automated trading and the changing nature of dark liquidity. The rules will be phased in over an 18-month period.

ASIC Chairman Greg Medcraft said the rules represent an appropriate policy and regulatory balance. ‘Developments in trading and market structure domestically and abroad are rapidly shifting the landscape of the Australian market, and we see a trend towards more frequent, smaller trades, away from public markets, with implications for the price formation process,’ he said. ‘The rules, the result of industry consultation dating back to 2010, address issues ASIC considers necessary to maintain fair, orderly and transparent equity markets.’ 

Rules which respond to the growth in high frequency trading (HFT) include volatility controls for extreme price movements – amending the existing anomalous order threshold and extreme cancellation range rules (applicable the day after registration of the rules), and extending the rules to the ASX SPI 200 index futures contract to minimise cross-product contagion (applicable in 18 months), and automated trading – tightening rules to require direct and immediate control over filters and orders, and amending existing rules requiring annual review of systems (applicable 18 months after registration).

ASIC’s rules on pre-trade and post-trade transparency requires meaningful price improvement and a tiered threshold for block trades (both applicable six months from registration). A rule requires market operators and participants to have in place systems and controls ensuring validation and verification of trades relying on the pre-trade transparency exception and/or post-trade delayed publication (applicable the day after registration).

A rule of enhanced data for supervision goes to the heart of market integrity and requires additional data on orders and/or trades including identification of crossing systems, flagging whether a participant is acting as a principal or agent, a client identifier or reference, identification of intermediary of Australian financial services licence holders, and whether a trade for a wholesale client was done through direct market access. For market operators, this rule applies from 28 October 2013. For market participants, the rule applies from 10 March 2014.

ASIC has established two taskforces to consider these key areas further. Both taskforces promote market integrity by identifying and taking actions against possible misconduct in the dark and through HFT. They are both reviewing the impact of these activities on market quality. The dark liquidity taskforce will consider the delivery of efficient price formation, informing investors about how their orders are executed, and promoting confidence in the integrity of the market. The HFT taskforce will analyse the prevalence, nature and impact of HFT in our market and abroad, and assess whether the current framework is adequate for HFT. 

Both taskforces are undertaking a thematic review and information gathering stage, which includes sending questionnaires to relevant participants and conducting meetings with industry. The analysis conducted on this intelligence, together with consideration of international developments, will inform ASIC on whether new rules, guidance, or law reform are required.

Any changes ASIC proposes will not occur without industry consultation.ASIC also welcomes the Minister's announcement that Treasury will be conducting a review of Australia’s financial market licensing regime. This is an opportunity to consider how to best cater for the dynamic and evolving types of trading venues in Australia, now and into the future. ASIC will discuss its views with Treasury, taking into account information gathered from its taskforces.

The following downloads are relevant:

• updated Regulatory Guide 223 Guidance on ASIC market integrity rules for competition in exchange markets, to give guidance on the draft new or amended market integrity rules for extreme price movements, enhanced data for market surveillance, pre-trade and post-trade transparency;
• an addendum to Regulatory Guide 172 Australian market licences: Australian operators to give guidance on systems and controls for holders of an Australian market licence;
• Regulatory Guide 241 Electronic trading on the new rules relating to automated order processing, consolidated with the updating of guidance which is currently contained in ASX guidance notes; and
• Report 311 Response to submissions on CP 179 and CP 184 Australian market structure: Draft market integrity rules and guidance.