ASIC Tightens Automated Trading Controls

The Australian Securities and Investments Commission (ASIC) has published its latest report on market structure, in which it has proposed enhanced oversight for automated trading strategies.

Market participants utilizing automated functions in trading will now be required to maintain pre-trade filters, as well as the ability to suspend or limit as required. They will also be mandated to hold increased control over their order entry systems, and to submit their systems for review at least annually.

ASIC expects the new rules to cost current participants for compliance, although it does mention that many firms already have similar processes in place. The rules have come on the back of a disaster at US broker Knight Capital several weeks ago, in which an abberant algorithm lost the company $440 million in a day, requiring it to be bailed out by a consortium of other brokers and market-makers.

"Recent events overseas are a reminder of the speed and automation of markets and the importance of robust controls over those systems," says Belinda Gibson, deputy chair at ASIC. "The enhancements to participant-level controls that ASIC has released for consultation, together with the market-level controls released in June will build confidence in the integrity and cleanliness of our capital markets and facilitate international capital flows. The increasing automation of trading, and ASIC's focus on it, is also evident in our market supervision report, which identified issues from high frequency trading. This type of trading, and algorithms generally, continue to be of concern. The measures we are proposing will strengthen our protection against the type of disruption we have seen recently in other markets."

The new proposals have been foreshadowed since June 2012, when the regulator published Consultation Paper 179. The new paper, 184, titled Australian market structure: Draft market integrity rules and guidance on automated trading, further extends previous mentions and opens the text to comment from market participants until September 2012.

The increasing automation of trading, and ASIC's focus on it, is also evident in our market supervision report, which identified issues from high frequency trading. This type of trading, and algorithms generally, continue to be of concern.

ASIC's review process has been held in tandem with the liberalization of its securities markets. Traditionally dominated by the Australian Securities Exchange (ASX), Chi-X Australia was allowed to launch as a competitor last year, prompting a rise in the use of electronic strategies such as those involving the use of algorithms and high-frequency trading.