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Cautious Pace by ASIC Is Key for Comprehensive Regulations, Fidessa Says

Posted: 08 Feb 2012

Regulators and market participants are working to define best execution for market participation in the context of a multiple market structure and while contending with how to define activities including high frequency trading (HFT). But, according to Steve Grob, director of group strategy at Fidessa, the liquidity aggregator, regulators are managing the process well and looking for comprehensive principles and regulators.

“What ASIC [Australian Securities and Investment Commission] and other regulators around the world have worked out is that there is this concept of the law of unintended consequences,” Grob says. “The minute you start trying to reset market structure, no matter how well you think it through, things are going to happen that you didn't expect. ASIC has recognised the concerns of the market over its original market safety rules, and it wants to follow a proper process, and so if it takes another month or two that’s fine. Contrast that with Europe, where MiFID was introduced five years ago, and they’re still debating MiFID II, some of which may not be implemented until 2015, and you get an idea of how quickly things are happening here.”

ASIC has extended the deadline for feedback on its second-phase consultation paper on equity market structure following a large amount of input from the industry. The new deadline is now February 20 for comment on the paper, CP 168, which covers ASIC’s proposed market integrity rules on high-frequency trading and volatility controls for extreme price movements.

“The thought that HFT is somehow inherently bad is wrong,” Grob says. “If you were to define HFT as electronic market-making, then the case for it is quite simple—market makers have existed as long as markets have, to provide extra liquidity when natural liquidity is not there, and so make sure that buyers and sellers can find each other. The antithesis of this argument is that they are not always there when markets are volatile or providing liquidity in suitable size.”

One of the sticking points seems to be the definition and treatment of algorithmic and high-frequency trading.

“It’s pretty hard to regulate something that you can’t define. This point is recognised in the appendix to CP 168,” Grob says. “ASIC talks about the characteristics that it thinks define HFT, but there’s no definition. I’m not blaming Australia, though, as this is a global challenge. Regulators everywhere are trying to figure out how to regulate HFT without really nailing down what it is.”

Fidessa has previously predicted that with Chi-X’s launch, Australia will see lower average trade sizes and higher total volumes, plus a rise in the level of “dark” or “non-lit” trading, for which the positives of being able to reduce market impact and trade size must be weighed against the market integrity issues and impact on price formation. In other markets, buy-side actors have said that the growth in dark pools has added an “unnecessary” layer to workflow.

In its third series of white papers on Australia, Fidessa notes that the regulatory process is ongoing and will ultimately take the form of principles-based approaches, which allows market participants to adopt their own procedures so long as they conform to best execution standards. But Fidessa also pointed out that traders on both the buy and sell side have an opportunity to use best execution as a commercial advantage, not just as part of regulatory compliance.

“On the buy side, if I’m not trading very often, my execution quality is going to be determined by my broker selection,” Grob said. “If I’m trading more frequently, execution is going to become more important. This applies both to the buy- and sell-side—if you treat all of this as a regulatory/compliance issue, then you’re going to find it quite hard as the regulations just keep on coming. But what we are seeing in other parts of the world is that firms are now stepping through this and committing to spending the money to get a much more intelligent view of their execution quality. Then they are using these tools to have a real-time electronic conversation with clients and so gain competitive edge.”

(RA)

If you have any comments about this story or news tips, contact Christopher Gohlke in New York at cgohlke@globalcustodian.com or Janet Du Chenne in London at jduchenne@globalcustodian.com.