Coronavirus: ASIC trading curb followed broker hook-up

An emergency hook-up of regulators, exchange chiefs and brokers paved the way for an unprecedented move to curb high-frequency trading.

Australia’s unprecedented step to curb high-frequency trading aims to keep markets operating smoothly. Picture: AFP

The unprecedented share trading limits forced on stockbroking houses by the corporate regulator on Monday have sparked calls for a more permanent solution, after they highlighted the stark pressure huge numbers of volumes placed on local markets.

The Australian Securities and Investments Commission communique to brokers hit at 8pm on Sunday after it held an emergency phone hook-up with the ASX, Chi-X and the nation’s nine largest brokers earlier in the day. The memo, which imposed a legal requirement to restrict volumes by 25 per cent from Friday’s bumper levels, required firms to confirm their participation in writing before the market’s open on Monday.

The measures came after huge trading volumes on Friday placed stress on clearing and settlement systems and those in the back office of broking houses. ASIC is implementing the limits to curb high-frequency trading and keep markets operating smoothly.

And its communique suggests the limits will be in place indefinitely.

“This direction has affect until ASIC notifies you in writing that it has been revoked,” the document sent to brokers and sighted by The Australian said.

Brokers scrambled over the weekend to rule off all trades after Friday’s record $18.1bn trading day on the ASX, reflecting about three times the daily average.

Investors have been responding to the coronavirus pandemic and its potential economic impact on the global economy, causing wild swings in financial markets this month.

But it was the sheer number of trades executed across the ASX and Chi-X – which swelled to about 7.1 million on Friday eclipsing a daily average of about two million – that concerned ASIC.

On the Sunday call were ASIC markets executive director Greg Yanco, markets infrastructure boss Nathan Bourne and supervision leader Clarissa Aldridge, The Australian understands. The ASX was represented by operating boss Tim Hogben, while Chi-X had chief executive Vic Jokovic on the phone call, sources said.

At least one broking firm on the call is said to have expressed caution about needing to undertake testing before the limits were put in place, otherwise most were in favour.

ASIC moved swiftly to impose the new trading limits on brokers on Monday. The limits mean brokers can only trade 75 per cent of Friday’s lofty trading volumes, a 25 per cent cut, or they can opt to take the reduction from their biggest trading day in the last 30 days.

“Australian markets have been strong and resilient over this period, and this action is pre-emptive and intended to maintain those high standards,” ASIC’s statement said.

“Australia’s equity markets have seen exponential increases in the number of trades executed, with a particularly large increase in trades last Friday, 13 March.

“While there was no disruption to market operations on Friday, there was a significant backlog of work required to be undertaken over the weekend by the exchanges and trading participants. If the number of trades executed continues to increase, it will put strain on the processing and risk management capabilities of market infrastructure and market participants.”

ASX chief executive Dominic Stevens labelled the ASIC action “sensible and measured”.

“This has presented operational challenges for the industry – albeit the industry has worked together to ensure it has been able to function in these extraordinary circumstances,” he said, although noted it should be just the “first step” by ASIC.

“More consideration needs to be given to a permanent solution. The industry cannot provide unlimited capacity at short notice. Regulators, exchanges, participants and investors will need to come to a decision on what they want for the future.”

An industry player, who declined to be named, said it was fortunate that the spike in trading activity occurred on Friday to allow the weekend to process the activity.

“It (ASIC’s trading limit) was sensible because Friday’s volumes were incredibly elevated,” he said. “The load (in broker back offices) is massive.”

Another industry participant said the measures highlighted inherent weakness in Australia’s market infrastructure, as other global bourses hadn’t imposed trading volume limits.

“This impacts our global reputation,” he said.

Heads of equities from firms including UBS, Morgan Stanley, Credit Suisse, JPMorgan and Macquarie Group, were on the call with ASIC. The nine firms on the call account for about 75 per cent of Australia’s equities market trading.

“UBS is fully supportive of ASICs initiative which is designed to ensure that the Australian market continues to operate with minimal disruption,” said Steve Boxall, UBS Global Markets head of equities for Australasia.

A statement from Chi-X said the exchange saw the measures as an “appropriate response to the recent exceptional volumes and the potential issues they may raise across the Australian market”.

Australia operates on a T+2 model, which sees the trade settled in two days.

Broking firms are understood to have informed their large high-frequency trading customers about the trading limits. High-frequency trading is a type of computer-generated trading that can transact large numbers of trades in fractions of a second, usually by drawing on algorithms.

The limits come as investment banks and broking firms have seen corporate advisory work such as acquisitions and sharemarket floats dry up during choppy markets.

The ASX also enacted a contingency plan on Sunday – ordering staff to work from home – after one of its employees tested positive to COVID-19.

Investment banks are running split teams across head office and back-up sites to ensure business continuity.