21 Aug 2014
ASIC ventures back into the pool
by Geoff Hoffman, Alexandra McCaughan
ASIC's review into broker dark pools comes as investigations by market regulators into the operations of dark pool trading venues gain momentum worldwide.
ASIC has announced that over the next 12 months it will conduct a review of some broker dark pools.
"Dark pools" refers to orders on a market that are not pre-trade transparent. These can occur outside public exchange markets, meaning the trade is not known to the rest of the market before the orders are matched as executed trades. From a regulator's perspective, dark trades undermine the integrity of the market.
The announcement of an ASIC review into broker dark pools comes as investigations by market regulators into the operations of dark pool trading venues gain momentum worldwide. In recent months, firms such as UBS, Credit Suisse and Deutsche Bank have been issued with requests from regulators to provide details about their dark liquidity trading venues. Further, in June 2014, the New York Attorney General issued a Summons to Barclays alleging fraud in connection with the marketing and operation of its dark pool.
ASIC expects the Australian market to be protected from such conduct owing to the introduction of new market integrity rules in 2013. These changes included:
- amending the "at or within the spread’" exception to pre-trade transparency, to require dark trades in smaller sizes (below block size) to provide meaningful price improvement (of one tick or at midpoint); and
- changing the "block trade" exception to pre-trade transparency, from a static $1 million to a tiered threshold structure of $1 million for the most liquid equity market products, $500,000 for comparatively liquid equity market products and $200,000 for all other equity market products;
- requiring greater transparency by operators of crossing systems.
A recent report for ASIC concluded that the new rules applicable to dark pool trades were working effectively, and that the new market rules had had the desired effect of improving fairness in the market.
ASIC stated that, while it did not propose to introduce further changes to the policy and rules on dark liquidity it would "continue to monitor market developments". The just-announced review appears to be part of this ongoing monitoring process.
Details as to scope of the proposed ASIC review of the broker dark pools have not yet been released. We will provide further information regarding the review once it is publicly available.