ASIC Reviews Dark Liquidity and High-Frequency Trading Impact on Australian Markets

Key Takeaways

• ASIC's Report 331 and Consultation Paper 202 examine dark liquidity and high-frequency trading in Australian equity markets, finding no systemic market abuse but identifying areas requiring new rules around dark pool transparency, conflicts of interest, and order size thresholds.
• Compliance teams at market participants and brokers operating crossing systems must prepare for new disclosure, monitoring, and transparency obligations commencing from May 2013.

Deep Dive

This information sheet summarizes ASIC's findings following an internal taskforce review of dark liquidity and high-frequency trading practices in Australian financial markets. While ASIC concluded there is no fundamental deterioration of market quality or systemic abuse, it identified specific issues requiring remediation, including widening bid-offer spreads linked to dark trading growth, conflicts of interest in broker crossing systems (38% of broker crossing system trades involved the broker as principal), and insufficient transparency for investors and listed entities regarding where and how their orders are executed.

Key regulatory changes include a new market integrity rule (effective May 26, 2013) requiring dark trades to occur at a "meaningfully better price" than available on lit exchanges, otherwise trades must move to lit markets. ASIC also proposed a potential future safety net introducing minimum dark order sizes (AUD $20,000, or AUD $50,000 for the largest securities) if dark trading continues to grow. Separately, the minimum block trade threshold was reduced from AUD $1 Million to AUD $200,000 for most securities, effective May 2013. Additional proposals include mandatory client disclosure when trades are executed in crossing systems, publication of course-of-sales reports three days post-trade, prohibitions on payment for order flow, and enhanced conflicts-of-interest obligations for brokers trading as principal.

For high-frequency trading, ASIC found no evidence of systematic manipulation or predatory behavior, though it proposed rules to reduce market "noise" from small, fleeting orders and new guidance on order-to-trade ratios and manipulative trading behavior.

Compliance teams at market participants, particularly brokers operating crossing systems, should review internal systems and controls against the proposed new rules, update client disclosure and best-execution practices, assess exposure to conflicts-of-interest risks when trading as principal, and prepare for enhanced monitoring and reporting obligations. Given the consultation period closed May 10, 2013, firms should confirm current compliance with rules that took effect in 2013 and ensure ongoing surveillance frameworks address order-to-trade ratios and dark trading price-improvement requirements. Firms should also review payment-for-order-flow arrangements to ensure prohibited practices are not in place.

Source: Australian Securities and Investments Commission