ASX calls for dark pool curbs
Securities Exchange (ASX) has urged regulators to rein in dark trading, after
revealing the practice accounted for around 25% of all Australian equity market
executions in the first six months of 2012.
As part of its
submission to a consultation by regulator the Australian Securities and
Investment Commission (ASIC), the ASX stated that the growing share of non-displayed
trading was damaging price formation in lit markets.
“There is clear evidence, both
in Australia and overseas, that an increase in dark execution results in
widening spreads, higher costs for investors and a negative impact on price
discovery,” read the ASX response.
Australian dark trading
platforms include broker crossing networks, non-displayed venues such as
Liquidnet, and the ASX’s own CentrePoint mid-point crossing facility, which
accounted for around 3% of dark trading according to the exchange’s own data. The
bourse also pointed out that dark trading reached a peak of 43% of overall
executions during one week in the middle of June (see chart).
The ASX backed ASIC’s proposal
that dark pools must provide meaningful price improvement of at least one tick
or a mid-point cross for orders below block size. Block size would be defined
as orders over A$200,000, A$500,000 or A$1 million, depending on the market
capitalisation of the stock in question.
The exchange also favoured a
minimum threshold of A$50,000 for dark orders, starting with a A$25,000 limit
to be imposed as soon as possible.
“It is important to be mindful that while price improvement may benefit the
individual investor, the removal of liquidity from the lit market will
negatively impact market quality on which all investors rely,” added the ASX
submission. “It is appropriate that breach of [the price improvement] rule
attracts the maximum penalty of A$1 million…and ASIC must resist attempts to
water-down implementation of the rule.”
ASX also urged ASIC to level the playing field between broker crossing
engines and regulated trading venues.
“The growth in dark execution
means that a growing proportion of trades are occurring on venues which do not
have the same regulatory standards as licensed markets,” read the response.
“These venues are effectively private exchanges as they involve the systematic
matching of orders and should be regulated in the same way as public lit
markets that perform the same function.”
The ASIC consultation, known
as CP179, suggested draft guidance on market operators’ systems and controls,
amendments to rules governing extreme price movements and proposals to enhance
data for market supervision. Many of the rule changes proposed in CP179 follow
feedback from another consultation on Australian market structure called CP168.
Respondents to CP168 expressed
concern over high-frequency trading and dark pools, urging ASIC to let
competition between trading venues develop further before introducing further
The regulator also
proposed new guidelines earlier this week on the oversight and controls for
automated market systems as part of the ongoing market structure reforms.