Australia had made its stance on the use of dark pools quite clear last year, when the national regulatory authority, the Australian Securities and Investments Commission (ASIC) announced that it considered dark liquidity to be part of the financial landscape, no doubt much to the joy of algorithmic and high-frequency traders.
Today, ASIC has published a full review of its recent rule changes which affect dark liquidity, further attesting to the widespread governmental acceptance of the use of dark pools, firstly officially defining the block size changes which were invoked last year.
On 26 May 2013, ASIC implemented a comprehensive package of rule changes relating to dark trading. The rule changes reduced the size requirement for block trades for most stocks in the market and imposed a meaningful price improvement requirement for below block size dark trades.
ASIC has retained Charles Lane Advisory Pty Ltd (CLA) to assist it to determine the impact of these rule changes on the use of dark liquidity and market quality. This report examines the impact of those rule changes.
In the 100 days before and after the rule changes, block trading increased from $39.5 billion to $52.8 billion, accounting for 8.1% and 11.4% of the total dollar volume traded over these periods. The increase included $5.8 billion in blocks below the previous $1 million block threshold. The increases in the fraction of dollar volume traded as blocks were greatest for the stocks where the threshold was reduced to $200,000.
For S&P/ASX 200 stocks with a threshold of $200,000 the fraction of dollar volume traded as blocks increased from 6.6% to 12.5%, and for stocks outside the S&P/ASX 200 index, block trading increased from 9.9% to 19.2%. The fraction of dollar volume below the previous $1 million threshold in these stocks accounted for 23% and 30% of blocks respectively, for each of these stock groups.
The report demonstrates that there was an increase in the dollar volume of blocks, from a total of $39.5 billion over the 100 days prior to the rule change to $52.8 billion in the 100 days
following. This represents 8.1% and 11.4% of total dollar volume traded, respectively. Block volumes have been extremely volatile historically, so it is difficult to directly attribute this increase in blocks to the rule change.
There is a clear decline in the dollar volume traded in below block size dark trades, from $73.8 billion in the 100 days prior to the rule change to $44.6 billion after. This represents a decline from 15.2% to 9.6% of total dollar volume, respectively. This decline, according to the report, was driven by the category labelled trades at or within the spread, representing priority crossings and NBBO crossings, from $54.9 billion to $21 billion. Priority crossings ceased to exist after the rule change. This category captures trades executed in broker-operated crossing systems and/or broker internalisation.
The requirement for below block size dark trades to offer price improvement was aimed at eliminating the possibility that dark orders step-ahead of orders displayed on the limit order book (sometime referred to as queue-jumping). This was intended to encourage the display of limit orders in lit order books and to protect the quality of the price discovery process.
The analysis presented in this report shows that the package of rule changes implemented on 26 May 2013 impacted the use of dark trading in Australia. Reductions in the block trade thresholds facilitated an increase in the level of block trading. The meaningful price improvement requirements reduced the level of below block size dark trading substantially. The average level of price improvement associated with these trades increased. Dark orders below block size can no longer step ahead of limit orders displayed on the exchange limit order books. With these results in mind, and many other jurisdictions bearing down on the use of algorithms and those who engage in high-frequency trading, there has been a move toward the provision of dark liquidity by connectivity providers, with venue-neutral infrastructure provider TMX Atrium having connected the world’s largest dark pool, UBS MTF, to its network just shortly after ASIC deemed the rule changes.
Indeed, could it be that European institutional traders may look toward operating anonymously on Australian venues to gain advantageous access to Asian liquidity? Now there’s food for thought.