Recently appointed sharemarket surveillance manager ASIC is planning a crackdown on potentially dangerous algorithmic share trading....
January 18, 2011
RECENTLY appointed sharemarket surveillance manager ASIC is planning a crackdown on potentially dangerous algorithmic share trading as the worldwide trend to automated orders takes hold here.
In its first supervision report since taking over from ASX Limited on August 1, ASIC commissioner Shane Tregillis warned of "a number of potential market abuses" and noted that algorithms can damage the integrity of the market.
The regulator appears to be battling two problems as algorithmic trading spreads: incorrect orders, both deliberately and accidentally placed.
"We're working actively with people who we believe are using anything from inefficient to defective algorithms," said Greg Yanco, the former ASX executive who now heads ASIC's surveillance operation.
He said one defective order he had seen would automatically cancel itself, removing a trade and then re-ordering it, in a "feedback loop" at a rate of 1000 times a second.
The federal government is close to awarding a market operator's licence to international group Chi-X Global, which will specialise in algorithmic trades. The removal of ASX Ltd's real time surveillance responsibilities last year was a part of that process, since, if there is more than one sharemarket in Australia, it would be impractical and undesirable for ASX to conduct surveillance on itself and a new rival. "What we want is for brokers to look at the procedures they're introducing for new algorithms and to make sure that they're not going to impact market integrity," Mr Yanco said. The 15-page report says that if needed, ASIC will take enforcement action against any market participant whose trading system interferes with the market's integrity. An unspoken element of ASIC policy is to avoid the notorious "flash crash" that struck US markets on May 6 last year when a carelessly priced "sell program" algorithmic trade made by a US institution on a bad trading day sent the Dow Jones Industrial Average down by over 1000 points, briefly wiping $US1 trillion from the value of US stocks. Elsewhere in its report, ASIC noted that although the number of suspicious trading alerts (about 300 a day) put up by surveillance staff since last August is in line with the previous ASX-managed regime, ASIC had been able to cut the amount of time needed to start investigations into suspicious market conduct. About 25 surveillance staff were rehired in the move from ASX to ASIC, to maximise continuity. Under the old ASX-ASIC regime it took up to three months for ASX to send referrals to ASIC, whereas the regulator is now hoping to cut that time by 30 per cent, particularly as they usually refer to insider trading. The Australian understands that because they are under the same roof, the surveillance and enforcement arms of ASIC can meet unofficially at least once a week to discuss possible and ongoing investigations.
