The Australian Securities and Investments Commission (ASIC) has released its market integrity rules on crossing systems, dark liquidity and high-frequency trading. These rules build on a previous announcement by the Minister for Financial Services and Superannuation. Crossing systems refer to those automated systems, provided by a market participant, which match client orders with those orders of the participant or other clients, other than on an order book. The number of crossing systems operating in Australia has been steadily increasing. In addition, crossing systems are taking on increasingly ‘market-like’ characteristics, including executing increasing numbers of orders for retail investors. However, crossing system operators have not been subject to the same requirements as market licensees, particularly relating to operational transparency and fair treatment of investors. This has lead to concerns that retail investors might be disadvantaged relative to wholesale investors when executing orders through crossing systems. Further, ASIC does not monitor crossing systems in the same way as other market operators. ASIC has released rules requiring crossing system operators to:
- disclose certain matters relating to their crossing system, including whether there is principal trading;
- not unfairly discriminate between users and allow clients to opt out of using their crossing system;
- report to ASIC any suspicious activity;
- implement appropriate controls for automated order processing; and
- enhance conflicts of interest management.
ASIC has also issued guidance on electronic trading targeting high frequency trading activities that utilise computer algorithms to generate large numbers of trading messages over short time frames. In considering whether a false or misleading market has been created, market participants will need to consider order frequency; the volume of each order; and order cancellation or amendment. Current manipulative trading rules will also apply more broadly across market operators. Those market operators who process significant numbers of international orders are already largely compliant with the new requirements, due to their need to meet requirements imposed by those overseas jurisdictions. These participants will incur relatively modest compliance costs. Other market participants will incur compliance costs in disclosing matters to their clients; and amending systems to provide more information about trades to clients. Those participants whose arrangements systematically favour certain clients will incur costs in modifying these systems. Suspicious trade reporting is anticipated to result in minor compliance costs. The updated RIS was prepared by ASIC and assessed as adequate by the Office of Best Practice Regulation.
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