The Australian Securities and Investments Commission (ASIC) has been alluding to tighter controls on automated trading and direct electronic access for some time, in keeping with initiatives from other global regulators looking to reduce the likelihood of future flash crashes or rogue algorithms. The key points are the requirement for cross-market, cross-asset credit checks, client-level kill switches and full visibility for the market participant of the sponsored client’s market-making activity.

 

Most of the proposals, such as the requirement for sign off by an authorized person from the market participant for algos coming through a member’s infrastructure, are in line with similar proposals elsewhere. There are, however, places where ASIC has suggested proposals that appear stricter than in other regions. A key example is the rule requiring sponsored firms to disclose their order trading instructions to the market participant. We expect this to be a contentious point since it raises questions over conflict of interest and the disclosure of intellectual property.

 

It’s also interesting to note that the definition of erroneous orders is much tighter here than in the US Securities and Exchange Commission (SEC) market access rule, taking into account not just duplicative orders but also looking at aspects such as the historical trading pattern of the stock and collection of orders and their general trend. This could generate a relatively high number of false positives.

 

Our experience in other markets suggests that the cost of compliance for the market participants is easy to underestimate. The delay to the deadline for compliance with the market access rule in the US demonstrates the significant attendant challenges. Firms will need to revisit their infrastructure to establish whether they can satisfy the requirements of the regulators, or whether they would be better served by a new system.

 

The proposals from ASIC are a positive step towards clarification of market participant responsibilities, helping to prevent future market instabilities and level the playing field for automated order processing and direct electronic access.