Day of reckoning for high-speed traders
The corporate regulator will reveal on Monday whether it will join the global push to impose stringent rules on high-speed traders.
The Australian Securities and Investments Commission releases its highly anticipated report on the impact of high-frequency trading and "dark pools" on Australia's financial markets.
At stake for traders is the definition of "market manipulation" and whether the current definition addresses what market participants describe as questionable and predatory trading practices by ultra-fast computer traders. The taskforces have also been considering if so-called "dark pools" - trading venues where orders are matched by electronic algorithms, with no human intervention - ought to become more transparent.
It provides ASIC with an opportunity to adopt world's best regulatory practice and comes after Germany, France and the European Union moved last year to impose new rules on high-speed traders.
One such rule is the requirement that stock orders rest on an order book for a minimum of half a second before they can be executed or cancelled. Half a second is a lifetime in the world of high frequency traders, where trades occur in nanoseconds - one billionth of a second.
The ASIC report follows the establishment in July 2012 of two taskforces to consider dark liquidity and high-frequency trading in response to rising fears for the market's integrity.
Last year ASIC proposed a series of rule changes for the local market, including the possibility of introducing "kill switches" to disable rogue algorithms and the ability to reset the market during unusual volatility. At the time, commissioner Greg Medcraft said one of ASIC's "strategic priorities" was fair and efficient financial markets.
"While some say high-frequency trading provides liquidity, I know some very senior bankers that privately describe it as providing only 'phantom liquidity'," he said.
"ASIC needs to keep pace with these rapid changes in technology to ensure markets are fair and efficient and investors get a fair price when trading on an exchange."
The ASIC report also follows a series of inexplicable share price spikes on the market last year, most recently in October where the prices of a number of ASX 200 stocks - including ANZ and Commonwealth Bank - surged and dropped back in the opening auction.
The Australian Securities Exchange has for months been warning about predatory high-speed traders and proliferating dark pools and how the market was fragmenting as a consequence.
Late last year Financial Services Council chief executive John Brogden said Australia was in a unique position to introduce regulation to avoid the "adverse impacts of high-frequency trading and dark pool trading" in Europe and the US.
"The US market is an example of what Australia can expect if action is not taken while there is a window of opportunity," Mr Brogden said.
The Industry Super Network - a representative body for the superannuation industry - last year called for a moratorium on high- frequency trading as part of its submission to ASIC on the subject.
Zachary May, ISN's director of regulatory policy, said high-speed trading was on the rise in Australia and it had already been found to exacerbate market crashes in other jurisdictions and undermine investor confidence in the fairness of markets.