2 August 2013

Further market integrity rules on dark pools and high frequency trading and Australian market licence review update

The Minister Assisting for Financial Services and Superannuation, David Bradbury, today announced a package of market integrity rules directed at better protecting investors and the stability of Australia's financial markets.

"The rules respond to issues identified by the Australian Securities and Investments Commission's (ASIC) dark pools and high frequency trading taskforces," Mr Bradbury said.

"These rules provide improved investor protection in dark pools by requiring dark pool operators to improve transparency of their market's operation and restricting preferential treatment for some investors. The rules also improve market integrity by harmonising market manipulation rules across licensed markets."

"The Government is acting to ensure that investors have continued confidence in Australia's financial markets. These new rules address investor concerns while also ensuring the benefits continue, such as investor choice and competition to lit markets from dark pools, and liquidity benefits from high frequency trading."

The new rules were refined after industry consultation by ASIC.

The rules provide for:

  • public disclosure of information so that market users can understand how their orders may be handled and executed;
  • details on the operation of the dark pool to be disclosed to clients;
  • dark pools to be operated by a common set of procedures, which do not unfairly discriminate between users;
  • investor choice to opt-out of trading in the dark pool if they wish;
  • dark pool operators to monitor orders and trades for compliance with the common set of procedures, and report suspicious activity to ASIC;
  • extension of existing automated order processing rules to dark pools;
  • dark pool operators to notify users and ASIC about system issues as soon as practicable;
  • clarification that tick sizes on dark pools are to be the same as those on lit markets;
  • improved management of dark pool operator's conflict of interest issues;
  • prohibition of negative commissions as payment for order flow; and
  • harmonisation of market manipulation rules across markets.

These rules will come into force in stages over a nine month period. ASIC will also issue guidance to clarify the new rules and expectations of market operators and participants.

"These rules build upon those approved in November 2012 to improve investor protection and market stability," said Mr Bradbury.

"We are already seeing benefits from those rules. For example the meaningful price improvement rule approved last year has resulted in a 40 per cent drop in below block size trading in dark pools in its first month of operation. This is a great success, and means that no further rules to encourage trading back to lit markets are necessary at this stage. However, additional rules remain an option if the meaningful price improvement rule proves insufficient over the longer term."

"In addition to these new rules, the Government is continuing to consider the appropriate regulation of dark pools and whether they should become licensed financial markets as part of Treasury's ongoing Australian market licence review."

Once the new rules are registered they will be available on the ASIC website.