A report, commissioned by ASIC, compiled by Charles Lane Advisory and entitled The Review of Recent Rule Changes Affecting Dark Liquidity, stated that the "meaningful price improvement rule" and changes to block tier thresholds introduced last year have addressed the fairness issues associated with below-size dark orders stepping ahead of lit orders.
The report also stated that while the rules have not affected bid-offer spreads, there is now a more equitable distribution of the bid-offer spread between parties executing below-block size dark trades
“Participants can now also trade smaller blocks away from lit markets where they would have traditionally faced higher market costs,” ASIC said in a release.
ASIC defines dark trades as “orders on a market that are not pre-trade transparent” that occur on public exchanges other than public exchange markets.
The analysis in the report focused on two types of darks trades including block special crossings, which prior to the rule change were required to be more than $1 million, and trade below-block size, which prior to the rule change could be executed at or within the spread.
The report said reductions in the block trade thresholds facilitated an increase in the level of block trading while the meaningful price improvements reduced the level of below-block size dark trading substantially.
The average level of price improvement associated with trades also improved, according to the report.
“These results indicate the package of rule changes implemented on 26 May 2013 facilitated the use of block trading and enhanced the fairness of dark trading relative to lit trading by not allowing dark orders to step ahead of lit orders at the same price,” said the report.
According to Charles Lane Advisory, this was without “any adverse impact on bid-ask spreads”.
ASIC Commissioner Cathie Amour said the results support the changes made in 2013.
She said that while bid-offer spreads did widen during 2013, this was driven by increased volatility at the time.
“After controlling for factors that are known to affect spreads, there has been no material change,” she said.
“We are satisfied the current policy settings and rule framework has had the desired effect of improving fairness and addressing the concerning trend of increasing below-block size trading and declining block size trading.”
Mr Amour said while ASIC is not proposing to change the current policy and rules on dark liquidity, it will continue to monitor market developments.
