ASIC today released the results of a review of rule changes affecting ‘dark trading’ and their impact on market quality.
The meaningful price improvement rule and changes to block tier thresholds were introduced in May 2013.
ASIC’s review indicates the trends in dark liquidity that were of some concern have discontinued. Report 394 Review of recent rule changes affecting dark liquidity (REP 394) shows:
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fairness issues associated with below block size dark orders stepping ahead of lit orders have been addressed
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the bid–offer spread is more equitably distributed between parties executing below block size dark trades
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the meaningful price improvement rule and change in block tier thresholds has not affected bid–offer spreads, and
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participants can now trade smaller blocks away from lit markets where they would have traditionally faced higher market impact costs.
ASIC Commissioner Cathie Armour said the results supported the changes made in 2013, ‘We saw bid–offer spreads widen during 2013. However, the widening in spreads was driven by increased volatility at the time. After controlling for factors that are known to affect spreads (trading activity and volatility), there has been no material change. Therefore, the meaningful price improvement rule and change in block tier thresholds has not affected bid–offer spreads.
‘We are satisfied the current policy settings and rule framework has had the desired effect of improving fairness and addressing the concerning trend of increasing below block size trading and declining block size trading. We do not propose to change the current policy and rules on dark liquidity, but will continue to monitor market developments.’
To examine the impact of the rule changes, ASIC:
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reviewed concerning trends identified in Report 331 Dark liquidity and high-frequency trading (REP 331) to determine whether they had responded to the rule changes as anticipated, and
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provided detailed market data to Charles Lane Advisory Pty Ltd, a market microstructure expert, to conduct a robust empirical analysis of the rule changes on market efficiency.
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Background
Dark liquidity refers to orders on a market that are not pre-trade transparent (i.e. not known to the rest of the market before the orders are matched as executed trades). Such trades, known as ‘dark trades’ can occur on public exchanges and in venues other than public exchange markets. Rather than routing an order to market, a market participant may choose to fill the order from its own inventory (known as internalisation) or it may choose to ‘cross’ it with other client orders.
In March 2013, ASIC published REP 331. This report outlined concerns around the impact of dark trading on price formation, queue jumping and the inability of the block tier threshold to efficiently account for differences in liquidity in determining the price impact of large trades. ASIC indicated that it would continue to monitor developments in markets, including the impact of revised market integrity rules on meaningful price improvement. REP 394 reports on these developments.