Australian regulator seeks action on high-frequency trade 'noise'

CANBERRA Mon Mar 18, 2013 5:40am GMT

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CANBERRA (Reuters) - Australia's corporate regulator called for tighter regulation of financial markets to deal with "noise" from high-frequency trading, while suggesting concerns about computerized transactions and associated crashes were largely unfounded.

The Australian Securities and Investments Commission, in a report on the impact of high-frequency trading (HFT) and so-called dark liquidity pools in instant market crashes, said high frequency trading in Australia was relatively small in scale.

"We found public concerns over HFT appear to have been overstated and can be attributed to the increasing use of trading technology by investors generally," ASIC said.

High-frequency trading refers to trades based on complex computer-based algorithms that guide decisions on what stocks to buy or sell. Using HFT, ownership of traded shares may last only fractions of a second and may not involve human intervention.

Dark liquidity or "dark trades" refers to orders away from the market, making them non-transparent. They have caused concern in the United States about whether firms are trying to manipulate prices in dark pools.

ASIC in its report on Monday found high-frequency trading in Australia was dominated by a small group of entities, with the 20 largest accounting for about 80 percent of all HFT turnover, or 22 percent of total equity market turnover.

An ASIC investigating task force found order-to-trade ratios in Australia were moderate compared to overseas markets and that the average holding time was 42 minutes, not seconds.

But the regulator said it had received feedback from market users that there were too many small and fleeting orders being used, despite a recent reduction, either to get a response from the market or disrupt other trading strategies.

"We concluded that small and fleeting orders are impacting market integrity and efficiency and investor confidence. To minimize this impact, we consider it is appropriate to require these orders to rest for a minimum amount of time in our markets," ASIC said.

Small orders of A$500 or less for equities traded on the ASX and Chi-X markets, the regulator said, should not be cancelled or amended within 500 milliseconds of being submitted to the trading platform of a lit exchange market.

The regulator also suggested new requirements for dark pool operators to keep and release information about their crossing systems, including details of principle orders and reporting of questionable activity.

High-frequency trades raised public alarm in May 2010 after a computer error involving a mutual fund triggered a 9 percent "flash crash" in the U.S. Dow Jones industrial average.

Several mysterious price spikes in Australia last October also raised concerns, including moves in the share price of Commonwealth Bank of Australia and Australia and New Zealand Banking Group.

Australia's government last year ordered a "kill switch" for automated transactions to be in place by June 2014 to halt trading in the event of a flash crash problem.

ASIC Deputy Chairman Belinda Gibson said the volume of dark trading was around 25 percent to 30 percent of all trades executed as a proportion of value.

(Reporting by Rob Taylor; Editing by Stephen Coates)