ASIC tells equity market participants to adjust algos amid market volatility

Maria Nikolova

The regulator expects all equity market participants to take reasonable steps to ensure the number of trades matched from their orders are capable of being handled by their internal processing and risk management systems.

The Australian Securities and Investments Commission (ASIC) has written to equity markets participants advising them to ensure orderly market functioning given recent market volatility.

During March and April 2020, Australian equity markets experienced significant volatility and record trade numbers. Whereas the markets remained orderly, this placed strain on the trade processing capabilities of market infrastructure, market participants and other service providers.

On March 13, 2020, the market exceeded the number of trades that could be reliably processed on a single day. To manage the risk to the market system, ASIC issued directions to nine large market participants requiring them to limit the number of trades executed each day.

ASIC understands that ASX, Chi-X and many market participants have taken steps to enhance their capability to manage large trade days. This is important because although the levels of 13 March have not been exceeded since, there remains a real risk, particularly if equity markets experience further days of elevated trading volumes.

ASIC has today revoked the directions issued to the nine participants and instead outlined expectations for all equity market participants.

The regulator expects all equity market participants to take reasonable steps to ensure the number of trades matched from their orders:

  • are capable of being handled by their internal processing and risk management systems, and if applicable, their clearing and settlement operations; and
  • support the fair and orderly operation of Australian equity markets.

The measures should include:

  • adjustments to algorithms (where firms and firms’ clients use them), such as minimising any excessive usage of very small orders;
  • intraday monitoring of a firm’s trade count, having regard to market-wide capacity constraints in the context of a firm’s market share; and
  • taking other actions that reflect and support a firm’s awareness of market-wide capacity constraints.

ASIC says it will continue to engage with participants, and take further actions where necessary and appropriate, to ensure that equity markets remain fair, orderly and resilient.

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