Stockbrokers challenge ASIC on algorithmic trading

The Australian Securities and Investments Commission (ASIC) has been taken to task for getting ahead of reality when it comes to algorithmic trading in Australian listed equities markets.

In fact, the Stockbrokers and Investment Advisers Association (SIAA) has told ASIC that it does not consider that the regulator has justified proposed changes to the rules and obligations around trading systems and automated trading and has warned it may be jeopardising a “last line of defence”.

In particular, the SIAA has defended the continuing role and need for Designated Trading Representatives (DTRs) irrespective of an ASIC statement that algorithmic trading in Australian listed equities comprises 85% of all trading.

“That is not the experience of our members who are retail brokers. Their feedback is that the percentage of algorithmic trading is likely lower than that,” the SIAA said. “It would be useful if ASIC could provide further detail about what assumptions were used to calculate this number.”

“While we agree that as trading systems have become more automated, the role of DTRs has changed, DTR’s continue to play an important role in our member firms. Indeed, in some of our smaller member firms DTRs manually enter all orders.

“In July 2024 several of our members met with ASIC representatives to discuss the important role played by DTRs in their firms.

“SIAA’s members who are online brokers report that greater than 90% of their orders are not manually entered but are sent via their trading system and are subject to filters before being routed to market or rejected.

“However, notwithstanding the low percentage of orders entered manually, our member firms rely on DTRs to deal with the ‘edge cases’ such as riskier orders (for example those in an illiquid stock) and are adamant that DTRs are critical to maintaining a Fair, Orderly and Transparent market.

“Our members rely on DTRs to deal with rejected orders and undertake ‘eyes on screen’ monitoring and surveillance. They may call the client and educate them on matters such as market manipulation and the importance of a Fair, Orderly and Transparent market.

“DTRs play a critical role in benching stocks ie turning off straight-through processing and cancelling the orders if they see bad behaviour. While our members rely on pre-trade filters, they consider their DTRs to be their ‘last line of defence’. The orders that require the attention of DTRs are where the risks lie for their firm.

The SIAA said a much higher percentage of orders are entered manually by DTRs at its member firms who are full-service brokers.

“Institutional orders are often worked by a DTR due to the nature of the clients. Buybacks are an example of this. Some firms require staff orders to be entered by DTRs in order to comply with client order precedence.

“DTRs at full-service broking firms play an important role in educating advisers. DTRs at our member firms also play a significant role in manually entering options orders into the market given the lower prevalence of straight through processing of options orders,” the SIAA said.

“We note therefore that any changes should not be based on the interests of institutional brokers alone. While they may account for the greatest value of trades, they do not account for the greatest number of investors. Given the size of retail participation in Australia’s capital market, it is essential that the views and practices of retail brokers are taken into account.”