THE Australian Securities Exchange has warned of increasing risks of sharp swings in the stockmarket with the rise of ultra-fast trading technology taking place on dark pool trading venues.
The comments come just days after Wall Street was hit with another high-tech trading glitch when a series of errant trades triggered sharp swings in stocks across the New York Stock Exchange.
The ASX raised the risks of the trading in its submission to the Australian Securities and Investments Commission review over rules to regulate the flow of trading away from the public exchanges into so-called "dark pools".
Dark pools are orders to buy or sell shares set up by brokers or specialist firms that are not submitted to transparent "lit" markets, such as ASX and Chi-X.
Dark pools already account for about 30 per cent of total Australian trading volume, and ASX has said the high-frequency computer-based traders operating inside them are effectively operating under limited regulation.
In its submission, ASX also said the increased level of trading that takes place in dark pools is resulting in higher costs for investors and resulting in widening spreads between buy and sell orders.
"There is clear evidence, both in Australia and overseas, that an increase in dark execution results ... in higher costs for investors and a negative impact on price discovery," the ASX said in its submission.
"Moreover, the proliferation of trading venues and algorithmic trading significantly increases the risk of unexpected market movements or disruptions, which can undermine investor confidence.
"There are now numerous examples of this in the USA, which today is one of the most fragmented markets in the world."
Last week, a glitch in a trading algorithm run by just one large Wall Street trading specialist, Knight Capital, led to a cascade of faulty trades that engulfed 140 New York Stock Exchange-listed companies.
ASIC is considering limiting the migration of trades to dark pools by allowing only large trades - ones of $1 million or more for the 26 biggest and most actively traded shares, trades of $500,000 or more for a group of 28 shares and ones of $200,000 for others.
ASX said the $1 million threshold was "too low" for some of the largest stocks on the market and called for a review of the limit. It also urged a minimum $25,000 threshold to be imposed on any dark pool trades.
Dark pool trading has grown significantly in recent years. ASX figures show the proportion of dark trades over the past year has varied between 14 per cent and 43 per cent of total turnover.