ASIC has released its market integrity rules on dark liquidity and high-frequency trading.

ASIC has also released guidance on the rules which clarifies ASIC’s expectations of market operators and participants.

‘The final rules follow extensive internal analysis and consultation with industry and will improve the transparency and integrity of crossing systems and strengthen the requirements for market participants to deter market manipulation,’ ASIC Commissioner Cathie Armour said.

‘We expect the new rules will quickly lead to changes in the behaviour of market participants, building on the positive changes we have already seen with other recent rule changes and the work of ASIC’s taskforces on dark liquidity and high frequency trading.

‘For example, there has been a significant decline in the volume of dark liquidity (below block size) as a result of the meaningful price improvement rule introduced in May this year, and we have observed a considerable drop in small and fleeting orders.’

Summary of rule changes

The rules will come into force in stages over nine months.

Dark liquidity

• Crossing system transparency and disclosure – crossing system operators must publish on a website information about their crossing system (e.g. products traded) (from10 November 2013). They must make disclosures to clients on the operation of the crossing system (from10 February 2014). They must identify in trade information for wholesale clients the crossing system and whether they traded as principal (from 9 May 2014). Crossing systems will also be publicly identified in course of sale reports.

• Crossing system fair treatment – the tick sizes that apply to exchange markets will also apply to crossing systems (from10 November 2013). Crossing system operators must have a common set of procedures which do not unfairly discriminate between users (from 10 February 2014) and allow clients to opt out of using their crossing system (from 10 November 2013).

• Crossing system monitoring – if suspicious activity is identified in a crossing system, it must be reported to ASIC (from 10 November 2013). Crossing system operators must monitor activity on their crossing system from10 November 2013. We will put in place a waiver so this will apply from 10 May 2014.

• Crossing system controls – existing system and control requirements for automated order processing will extend to crossing systems (from 26 May 2014) and crossing system operators must notify users and ASIC about system issues as soon as practicable (from 10 February 2014).

• Enhanced conflict of interest obligations – market participants must protect confidential client information (from 10 February 2014) and deal with client orders fairly and in due turn (from 9 February 2014).

• Order flow incentives – market participants will be prevented from receiving negative commissions (from 10 February 2014).

High frequency trading

• Manipulative trading circumstances of order – market participants must consider additional circumstances in considering whether a false or misleading market has been created; the frequency with which orders are placed, the volume of products that are the subject of each order and the extent to which orders made are cancelled or amended relative to the orders executed (from 9 February 2014).

• Manipulative trading rules harmonised – market participants of the ASX 24 market will need to comply with new requirements to prevent manipulative trading, the same as currently apply to the ASX and Chi-X markets (from 9 February 2014).

ASIC will release guidance on automated trading and market manipulation in coming months.

Download:

Regulatory Guide 223 Guidance on ASIC market integrity for competition in exchange markets (RG 223)

Report 364 Response to submissions on CP 202 Dark liquidity and high-frequency trading: Proposals (REP 364)

ASIC Market Integrity Rules (Competition in Exchange Markets) Amendment 2013 (No. 2)

ASIC Market Integrity Rules (ASX 24 Market) Amendment 2013 (No. 2)

ASIC Market Integrity Rules (ASX Market) Amendment 2013 (No. 2)

ASIC Market Integrity Rules (Chi-X Market) Amendment 2013 (No. 1)

ASIC’s Market structure page has further information.

Editor's note:

On 21 August 2013 ASIC released an updated Regulatory Guide RG 241 Electronic trading (RG 241) which provides guidance on automated trading.