The extent to which the rapid and continual advancement of technology which is used within the financial sector is increasing is largely attributable to its use within electronic trading, and the associated requirement for all participants to compete with each other via the use of highly complex systems.
Such has been the effect on the evolution of the financial sector that national regulatory authorities are having to adapt quickly from the decades of compliance inspection-style, grass roots oversight, to include methods of overseeing highly technological trading infrastructure which connects trading desks from all over the world with venues, themselves highly sophisticated.
Australia’s national financial regulator, the Australian Securities and Investment Commission (ASIC) has taken a pragmatic approach to the regulation of dark liquidity, the use of algorithms, and high frequency trading.
Greg Medcraft, Chairman of ASIC recently provided his perspective on what he considers to be the “creation of a dynamic landscape” as a result of financial innovation-driven complexity, at the Stockbrokers Association of Australia’s annual conference.
Mr. Medcraft covered this particular topic, which ASIC has taken an avantgarde stance on recently, by stating that “an area where I see innovation-driven complexity is in financial markets. The financialization of markets – for example, through high frequency trading, dark liquidity and speculative trading – creates new risks in terms of ASIC’s strategic objective of fair, orderly and transparent markets.”
“We must never lose sight of the fact that – at their core – markets assist in funding the real economy and in doing so help fuel economic growth. Markets do not simply exist to feed on themselves. We all benefit from having markets that are fair, orderly and transparent. It helps drives growth and creates new opportunities – including for those who participate in and support our markets” continued Mr. Medcraft.
He confirmed that “At ASIC, we see ourselves as an important partner with industry in the continued success of our markets. In particular, our work on high frequency trading and dark pools demonstrates that we will roll up our sleeves, constructively engage with the market and adapt our regulatory approach as the market evolves.”
As with many new and controversial phenomena, those who engage in the practice of trading via highly technological methodology in order to gain an advantage have earned themselves a nickname – The Flash Boys – coined by American author Michael Lewis in the title of his book which claims that high frequency trading companies have ‘rigged’ the US stock markets and in doing so have profited tremendously by being able to conduct their business far quicker than competitiors.
Mr. Medcraft covered this subject, by explaining that “Many local media outlets have been quick to try and draw parallels with the Australian market. I would like to stress that any suggestion that predatory high frequency trading is widespread in Australia is simply not supported by the evidence.”
“In any case, the Australian market is very different from the US market. For instance, our market is far less fragmented. In fact, we were mindful of the level of fragmentation in the United States for on-market and off-market trading facilities when designing our own market competition rules” continued Mr. Medcraft.
“The book, Flash Boys, also suggests that there is a problem in the United States with limited transparency via dark pools that is to the detriment of investors. ASIC – as the enforcer of market laws in Australia – has not and will not tolerate this type of behaviour. In 2012 and 2013, ASIC introduced new market integrity rules to ensure there is transparency on the rules of engagement in dark pools. We are monitoring the effect the rules are having in the market and are satisfied that the current regulatory settings are appropriate to address any concerns regarding dark liquidity in Australia.”
“This is something we noted when we released Report 394 Review of recent rule changes affecting dark liquidity earlier this month. Do not mistake our lack of hysteria for complacency. We continue to be the cops on the beat on this and are actively monitoring high frequency trading and dark liquidity. We will take swift action where we detect predatory trading” he concluded.
Indeed, ASIC has clearly understood over recent years that it is a very well respected regulatory authority, especially when it comes to electronic trading, FX in particular.
Australia is well placed as a jurisdiction from which western FX firms can approach the highly coveted client bases of Hong Kong, Singapore, Malaysia and even mainland China due to its proximity and compatibility as a trade partner with Asian nations, therefore a very prudent move by ASIC has been to accept the existence of high frequency trading and algorithms, which are in widespread use among the trading desks of Hong Kong and Singapore, yet take a very strong stance on regulating the use of such means, as well as ASIC having gone high-tech itself by implementing a surveillance system in order to monitor behavior within its increasingly electronic financial markets sector.