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In profile: Mike Aitken, financial markets guardian

by Bernard Kellerman | 23 May 2014

The world's financial regulators are under pressure to 'do the right thing' by all parties: market players, investors large and small and governments of all stripes. Professor Michael Aitken, head of Australia's Capital Markets Cooperative Research Centre, argues that any changes introduced mustn't turn noise in the market into an expensive disaster.  

Earlier this week, ASIC released the results of a review of rule changes affecting ‘dark trading’ and their impact on market quality. 

ASIC's move came almost exactly a year after its chairman Greg Medcraft announced a task force had found that some of the public perceptions about high-frequency trading (HFT) and use of dark pools had been overstated. 

“We found no evidence of systematic manipulation or gaming behaviours (such as layering or quote stuffing) by high-frequency traders,” Medcraft told an industry forum a year ago. 

Nevertheless, ASIC had been under pressure since then to safeguard against negative price impacts caused by HFT operators and to improve disclosure around dark trading. 

ASIC’s latest pronouncement indicates the trends in dark liquidity that were "of some concern" have "discontinued".

Here are the main areas where ASIC is no longer overly concerned:

  • fairness issues associated with "below block size" dark orders stepping ahead of lit orders have been addressed
  • the bid–offer spread is more equitably distributed between parties executing below block size dark trades
  • the meaningful price improvement rule and change in block tier thresholds has not affected bid–offer spreads, and
  • participants can now trade smaller blocks away from lit markets where they would have traditionally faced higher market impact costs.

ASIC Commissioner Cathie Armour said the results supported the changes made in 2013: 

"We saw bid–offer spreads widen during 2013. However, the widening in spreads was driven by increased volatility at the time. After controlling for factors that are known to affect spreads (trading activity and volatility), there has been no material change. Therefore, the meaningful price improvement rule and change in block tier thresholds has not affected bid–offer spreads.

"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. 

"We do not propose to change the current policy and rules on dark liquidity, but will continue to monitor market developments," Armour said.

Financial markets guardian

It's episodes like this that inspire Prof Michael Aitken, who heads up the Capital Markets Cooperative Research Centre (CMCRC), to claim he's the guardian of the world’s financial markets.

More accurately, he's a firm believer in the use of all available data to back any legislative changes — in his parlance, evidence-based policy-making. 

Aitkin says a system needs to be based around fairness and efficiency, which is what a regulator is there to ensure. 

He suggests by way of example, the introduction of alternative equities trading venue Chi-X into the Australian market created a measurable improvement in efficiency by pushing transaction costs down. But it took so long that other potential competitors to the monopoly of the ASX ran out of patience.

Says Aitken: "we need to instil a sense of competition in the regulators as well. Every other regulator in the world hasn't had to take three years to decide whether a new licence application should be granted [to a competitor of an incumbent operator]. For example, in Canada it's 45 days; other jurisdictions might take 90 or 180 days.

"It's cost us up to $100 million, working with universities and industry for the last 10 years, going to each market in the world, and developing a sophisticated model of what optimal financial market regulations should look like.

"What we've done is to create a whole lot of metrics around fairness and efficiency so every time there is a [financial] markets design change in the world, we can tell you what effect it has.

"We can now monitor what happens after regulations are been changed in any market in the world.

"It's not an easy thing to do, but if you can set up a continual review mechanism you don't need to have an enquiry every 10 years," he says. 

It's also a way to boost Australia's national income and credibility on the world's financial markets.

Aitken is referring here to the CMCRC's biggest money spinner, the SMARTS monitoring and surveillance technology, which has been adopted by 35 national exchanges and regulators and 65 brokers in 50 countries.

“When we started there was no such thing as market surveillance on a large scale — now SMARTS is the largest provider of this type of technology in the world,” says Prof Aitken.

Reversing the brain drain

“We have graduated 110 PhD students and created more than 200 jobs in spin-off companies since we began in 2001,” Aitken said. “The tax receipts alone from these new jobs fully refunds the Australian Government’s support for the Capital Markets CRC Program.”

“Many businesses tend to work at 90 per cent capacity, which makes it difficult for them to take on new technology, but this is made much easier by having PhD students placed in their business.

“And by doing this we are creating entrepreneurial people, who may go on to setting up their own start-up companies. Around 30 per cent of students return to university, 50 per cent go into industry and 10 to 20 per cent go on to set up their own company.”

In February this year, the CRC was awarded $32 million from the CRC Program to match equivalent cash contributions from universities and industry partners. This will allow the CRC to extend its work to 2019. 


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