THE head of Australia's securities regulator has warned of the risk to financial markets posed by high frequency and algorithmic trading, predicting that keeping pace with increasingly complex markets would be one of the agency's biggest challenges over the next decade.
Greg Medcraft, the chairman of the Australian Securities and Investments Commission, said that advances in technology had led to increasingly complex financial products and markets, with trades that once took one or two seconds to take place now involving "milliseconds to microseconds".
"Technology is advancing at a rapid rate and the complexity it brings also increases risk in the system," he said, speaking at meeting of the Asian and Oceanian Stock Exchanges Federation in Sydney.
As well as the prevalence of high frequency and algorithmic trading, so-called "dark pools" - off-market trading venues - were becoming more prominent and exchanges were moving to faster trading.
"They raise a number of issues that can impact on the fair, orderly and transparent operation of the financial markets," he said. "These are important issues which ASIC is taking seriously."
His comments come as ASIC weighs up plans to impose new controls on dark pools and high frequency trading. In a consultation paper released late last year, ASIC proposed measures such as "kill switches" to instantly halt trading in the event of a so-called "flash crash" - similar to that which hit the New York Stock Exchange almost two years ago, when a big algorithmic trade triggered a 600-point market plunge.
Mr Medcraft said ASIC was reviewing submissions on its proposals and would release its final guidance by the end of the year.
Meanwhile, ASIC said that "innovation" in exchange traded funds was bringing new complexity and risks to the products, popular with Australian retail investors.
The regulator said that it may consider requiring retail investors to seek advice before trading in ETFs,"if problems emerge about the extent of retail client use of ETFs that are unsuitable for the client".
In a report released yesterday, ASIC estimated that as much as 75 per cent of ETF assets in Australia were held by retail investors, with up to 40 per cent by self-managed super funds. This was in contrast to Europe and the US, where about 80 per cent and 50 per cent of ETF assets, respectively, were held by institutions.
ASIC noted that many retail investors were trading ETFs without first receiving financial advice - including self-managed super fund trustees using their retirement funds.