ASX Recommends Limitations for Dark Pool Trading

With Wall Street succumbing to another trading glitch this week, the Australian Securities Exchange (ASX) said traders have to be wary of developing risks in the stock market involving the use of “ultra-fast trading technology.”

The ASX raised this concern when it submitted to the review by Australian Securities and Investments Commission (ASIC) in connection with the rules on the trading in dark pool venues.

Dark pool is otherwise known as shares set up by brokers who do not submit to the same transparency done in “lit” markets. There are apparently some 30 percent of Australia’s trading volumes involved in dark pool accounts. They also make use of computer-efficient, high frequency traders.

At this point, dark pool trading venues have little regulation.

Trading under these levels increases the risks and cost for many investors, which also influences the gap between orders for buying and selling shares.

In its statement the ASX notes that it is evident that there is a marked increase in dark execution results in terms of the negative impact on price discovery and higher cost for investors. These apply both to Australia and overseas.

ASX also added that proliferation of algorithmic trading and trading venues has significantly increased the risk of sudden and unexpected movements or disruptions in the market. This, in turn, can affect investor confidence.

According to the ASX, there are many examples of situations like this in the US, which is also one of the most fragmented markets.

The ASIC is reportedly considering making limitations for dark pools trades to those over $1 million or higher.