Australia clamps down on ‘algo’ trading By Jeremy Grant in Singapore Australia has moved to clamp down on “aberrant” automated share trading, unveiling sweeping proposals that would require traders to have controls on their systems and test them annually to prevent market disruption. The move from the Australian Securities & Investments Commission comes only weeks after malfunctioning software at Knight Capital, a US broker, highlighted the vulnerability of equity markets to algorithms that go wrong. It is also a sign that regulators in key Asian markets are determined to avoid the mistakes made in US and European markets where the unfettered development of rapid automated trading has led to a fundamental reassessment of equity market structure. Last month, Hong Kong’s Securities and Futures Commission issued a proposal requiring that algos be tested at least annually. Belinda Gibson, Asic deputy chairman, on Monday said: “Recent events overseas are a reminder of the speed and automation of markets and the importance of robust controls over those systems.” She added: “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 proposed rules would require market participants to have direct control over pre-trade “filters”, and to suspend, limit or prohibit an order or series of orders from automated processing that would “interfere with the efficiency and integrity of the market in relation to one or more authorised persons”. “This will ensure that market participants have the ability, in real time, to control and prevent aberrant order flow before it disrupts the market,” Asic said. Asic also proposed fining traders A$1m (US$1.1m) if they did not have arrangements in place to trace the origin of all orders and trading messages – electronic signals that carry orders to an exchange or trading platform. The watchdog said it believed the proposals would “raise expectations” for the testing of automated trading systems, filters and controls and “provide the investing public with greater confidence?...?in Australia’s equity markets”. While most trading firms already have in place some controls over algorithms and brokers have been adopting “pre-trade risk management” systems to help prevent problems, Australia’s measures would require market participants to go further. “We expect market participants that do not already have this technology to incur some cost in building the capability. All market participants may need to review existing policies and introduce new procedures,” the watchdog said. The proposals are the outcome of a wide-ranging study into Australian market structures that began in 2010 ahead of the start of competition in Australia’s equity markets. ASX, the Australian exchange, dominated share trading in the country until late last year, when Chi-X, operator of an alternative trading platform, entered the market. That has split share trading between the two venues, offering arbitrage opportunities that are suited to the use of algorithms.
