The use of analytics in policy formulation and review
Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, July 2014.
ASIC uses data analytics to assist with policy formulation at all stages of its development. The use of data analytics ensures that our policy decisions are based on identifiable and measurable market outcomes. This enables us to better detect, understand and respond to market issues.
We use data analytics to assist us to:
- monitor market quality metrics;
- examine the prevalence, impact and extent of potential or emerging issues;
- identify or corroborate concerns raised internally or by industry; and
- evaluate the costs and benefits of different policy options and the consequences of maintaining the status quo.
In addition to identifying possible market misconduct as part of our market surveillance activities, the results of our analysis are often presented in ASIC consultation papers, reports or Market Supervision Updates. They may also form a core input into Regulation Impact Statements (RIS) for proposed policy or rule changes. A RIS is a Government requirement and must accompany every new policy proposal which has a measurable impact on businesses, community organisations or individuals.
Over the past five years, we have used data analytics to inform major markets policy projects, including:
- market competition reforms (Report 215 Australian equity market structure);
- market structure reforms (Report 311 Response to submissions on CP 179 and CP 184 Australian market structure: Draft market integrity rules and guidance); and
- dark liquidity and high-frequency trading taskforces (Report 331 Dark Liquidity and high-frequency trading (REP 331)).
Using data analytics also assists us to conduct post-implementation reviews of policy changes to ensure that intended outcomes are being achieved and that initial policy concerns no longer remain. An example of this is our review of recent rule changes on dark trading and market quality.
We took two approaches to examining the impact of rule changes in this instance:
- we revisited concerning trends identified in REP 331 to determine whether they had responded to the rule changes as anticipated. Specifically, we monitored the market by comparing the time periods analysed in REP 331 with the market one year on. This allowed a comparison of the market approximately six months before and after the rule changes, while also providing reference to the baseline period used in REP 331; and
- we provided detailed market data to Charles Lane Advisory Pty Ltd (CLA), a market microstructure expert, to conduct empirical analysis of the impact of the rule changes on market efficiency.
This enabled us to review the impact of the rule changes through longer term trends and a shorter term event study assessing measures of market efficiency.
Overall, ASIC’s review indicated that the trends in dark liquidity that were of some concern have discontinued. Moreover, that the current policy settings have achieved the desired effect of improving fairness, providing a more tailored policy for executing block size trades and addressing the concerning trend of increasing below block size trading and declining blocks: see Report 394 Review of recent rule changes affecting dark liquidity. As a result, we decided to maintain the current policy settings and rules on dark liquidity and to continue to monitor market developments.
Although data analysis may provide a sound basis for decision making it is not a substitute for consultation. Each of the policy initiatives we have taken has been accompanied by consultation with industry. This includes formal consultations, as well as soft soundings and workshops.
Other regulatory tools ASIC relies on to ensure our financial markets are fair and efficient include: surveillance, enforcement activity, stakeholder engagement, guidance and education. The depth of our regulatory toolkit ensures that financial investors and consumers can be confident in the integrity of our markets.
Suspicious activity reporting
Under rule 5.11.1 of the ASIC Market Integrity Rules (ASX Market) 2010 and ASIC Market Integrity Rules (Chi-X Australia Market) 2011, participants of the ASX and Chi-X markets must notify ASIC if they have reasonable grounds to suspect that a person has placed an order or entered into a transaction while in possession of inside information, or which has the effect of creating or maintaining an artificial price or a false or misleading appearance in the market or price for trading in financial products. This is known as the suspicious activity reporting (SAR) rule.
The SAR rule commenced on 20 January 2013. Since then, ASIC has received a total of 107 SARs from 25 market participants. Of these reports, one market participant was responsible for almost 19% of the total. Five other market participants each submitted five or more SAR reports.
The importance of SAR to ASIC is reflected in the number of reported matters being referred to ASIC's Enforcement team for further investigation. Approximately 14% of SAR reports received to date have been referred to Enforcement.
The vast majority of market participants have not submitted any SARs in the period 1 January 2014 to 15 June 2014. ASIC would like to remind all market participants of their obligations under Rule 5.11.1. To ensure compliance with this market integrity rule, ASIC will inspect breach registers of market participants in the near future as part of its Participant Compliance Surveillance Review program. We will also consider whether matters that come to our attention in other ways should have been reported under the SAR rule.