Algorithmic Trading and Market Access Arrangements

TABLE OF CONTENTS
Executive Summary........................................................................................................................ 3
Summary of the ASX Review Findings - Backward-Looking........................................................ 7
Summary of the ASX Review Findings - Forward-looking ........................................................... 9
Summary of Intended Actions and Recommendations.............................................................. 10
Paper Structure ........................................................................................................................ 13
PART ONE: BACKWARD-LOOKING FINDINGS ............................................................................. 14
1. Terminology .................................................................................................................... 14
2. Current ASX Practices..................................................................................................... 17
2.1 Access ............................................................................................................................ 17
2.2 Algorithms in Use............................................................................................................ 19
2.3 Trading Volumes ............................................................................................................. 20
2.4 Metrics ............................................................................................................................ 22
2.5 Supervision..................................................................................................................... 23
3. SIRCA Research: Impact of Algorithms on Market Quality............................................... 24
4. Overseas Comparison..................................................................................................... 25
PART TWO: FORWARD-LOOKING FINDINGS ............................................................................... 28
5. Overview of Future Trends .............................................................................................. 28
5.1 Macro-Trends: Regulatory Environment .......................................................................... 28
5.2 Micro-Trends: Algorithm Development ............................................................................ 29
6. Operational Issues and Recommendations...................................................................... 30
6.1 Risks and Controls.......................................................................................................... 30
6.2 Enhanced Direct Market Access Arrangements............................................................... 31
6.3 Algorithm Testing............................................................................................................ 32
6.4 Trading Aberrations ........................................................................................................ 33
6.5 Trade Cancellations / Wash Trades.................................................................................. 34
7. Supervision Issues and Recommendations ..................................................................... 36
7.1 Scope of Operating Rules................................................................................................ 36
7.2 Client ID .......................................................................................................................... 37
7.3 Market Manipulation ........................................................................................................ 38
7.4 Liquidity Detection .......................................................................................................... 41
7.5 IT Infrastructure, Security and Controls........................................................................... 41
Appendix 1: SIRCA Report ........................................................................................................... 43
Appendix 2: Technical Information on ASX Current and Proposed DMA Models........................... 53