The Australian Securities Investment Commission is concerned that so-called dark pool and high frequency trading may damage price discovery or lead to market crashes.
Belinda Gibson, ASIC’s deputy chair, says high frequency trading could lead to abuses and market disruption.
High frequency traders use mathematical formulas to trade millions of stocks within seconds to take advantage of minute differences in share prices.
About 25 per cent of all trading on the Australian stock exchange may be high frequency trading. In the US, it is as high as 70 percent.
Such trading can be abusive and manipulative and inhibit price discovery, according to Gibson. It could lead to a ‘flash crash’ similar to that which occurred in the US in May 2010 when the Dow Jones Industrial Average plunged almost 1000 points, yet recovered those losses within minutes.
The ASX Group wants ASIC to regulate high frequency trading.
“We don’t want manipulative algorithm trading,” says Gibson. “We will take enforcement action.”
Dark pool trading is also increasing in Australia.
Gibson says the value of dark pool trading at the end of 2011 accounted for 4 per cent of the value of stock market turnover, up from 2.5 per cent in June last year.
“So much trading on the dark market may damage price discovery,” says Gibson.
Dark pool trading is offered by brokers who seek to match large buy-and-sell orders anonymously off exchange. Investors who utilise dark pools say they do so to prevent information leakage that may negatively impact the price at which they buy or sell stocks.
Gibson says there is little regulation of dark pool trading and that ASIC may have to review it.
She urges institutional investors to voice their opinions on dark pool and high frequency trading.
Gibson spoke at the Ownership Matters governance conference in Melbourne on April 3.