Australia financial regulator ASIC has published the results of two studies it had commissioned on high-frequency trading and dark liquidity – two very controversial topics of late in financial trading – and the results will likely surprise a lot of people.
ASIC has concluded that financial market users have become better able to operate in an electronic and high-speed environment. As such, current levels of high-frequency trading and dark liquidity are not adversely affecting the function of markets for businesses and investors.
ASIC’s studies were, of course, focused on Australia’s equity and futures markets, but carry lessons to markets worldwide.
ASICS’s ‘Report 452’ was the result of two new reviews, which build on ASIC’s original 2012 analysis of equity markets, and assess the impact of high-frequency trading on futures exchange markets.
High-frequency trading
ASIC’s updated analysis showed that market users have become better informed and equipped to operate in an electronic and high-speed environment, and negative sentiment about high-frequency trading has reduced.
The level of high-frequency trading in Australia’s equity markets has actually remained steady at 27% of total turnover since 2012. High-frequency trading has grown by 130% in the futures market since December 2013 to 21% of volume traded in the SPI and 14% of bond futures. ASIC believes that these volume levels are not currently concerning, however ASIC will continue to monitor future developments.
ASIC has found that high-frequency traders have become more sophisticated, generating higher gross revenue and trading more aggressively than in 2012. They are also more active in mid-tier securities.
Predatory trading by high frequency traders does not generally appear to be excessive. Some institutional investors have become more sophisticated, increasingly managing their own order flow and execution decisions so they can limit interaction with predatory traders and improve their trading outcomes.
Dark liquidity
Dark liquidity has also remained reasonably constant at around 25-30% of total equity market turnover. However, its composition continues to change. Since ASIC’s 2012 review there has been a shift back to using dark liquidity for its original purpose – that is, for large block trades.
Feedback from stakeholders also indicated that there was now less concern with dark liquidity in our markets. Concerns ASIC previously held about the transparency and fairness of market participant-operated crossing systems have mostly abated.
However, ASIC remains concerned about exchange market and crossing system operators seeking to preference some users over others. It is concerned about the methods used by some market participants to manage their conflicts of interest for principal trading and client facilitation.
To see ASIC’s press release on the new HFT / dark liquidity report click here.