A year after the so-called flash crash damaged confidence in equities, exchange regulators across the world were scrambling to catch up, leaving investors with an increasingly complex range of market microstructures to navigate, experts said.
The Securities and Exchange Commission (SEC) quickly moved to introduce single stock circuit breakers after the flash crash – where the S&P 500 index suddenly plunged 6 per cent before recovering in minutes – and were now looking towards further trading safety nets.
But Asian exchange regulators were still grappling with what steps to take to ensure a similar event did not derail their own markets and were watching closely how regulations unfolded in North America and Europe.
Tabb Corp market structure expert Miranda Mizen said the flash crash had prompted Asian regulators to increase their contact both with other regulators and market operators.
The increased interactions between regulators and market players had revealed that, despite a year having passed since the flash crash, there was still a lack of understanding in the industry about the implications and risks in high frequency trading, Mizen said.
“It takes a while to adapt to this change. Generally we say it takes a trading generation to get going” Mizen said.
According to experts Asian markets were also seeing a growing penetration of high frequency and automation but Mizen said they did not have the same vulnerabilities as their North American and European counterparts.
Asian markets had not experienced the same fragmentation of trading flows caused by consolidation of traditional stock exchanges nor the widespread introduction of alternative venues that had occurred in the United States and Europe.
But Mizen said the lack of a harmonised regulatory framework across the region did not leave equity markets here vulnerable to similar flash crash-type events.
This had eased some of the pressure on Asian regulators to act and had given them a chance both to see how changes played out in North America and Europe and tailor their own solutions to match their respective markets.
Liquidnet Asia Pacific Director Lee Porter said regulators across the region were edging towards similar circuit breakers but that harmonising regulations would add confidence.
“The markets in this region still have quite a way to mature and there is some catch-up that needs to be played so I think implementation of circuit breakers across the board does make sense,” Porter said.
“But what you don’t have is a common regulator across the Asia Pacific, they are still relatively siloed. I can see there will be harmonisation of regulation along the way but I would hope this happens sooner rather than later.”
Alongside these changes regulators were also shining a light on how dark pools operated. In the Asian region the Australian and Securities Commission had deferred hard and fast rules but had bolstered reporting requirements for dark pool operators.
“Dark pools, alternative trading venues, algorithm trading and all of these things have been evolving in the US and Europe — we are paying catch-up in Asia and (these) have been taken up fairly quickly and that will only accelerate,” Porter said.
This had focused attention on the trading part of the investment cycle, with the execution of an investment strategy so it was both protected and could take advantage of particular market microstructures as a potential pathway to improved returns.
“While the flash crash was an unfortunate event it has also been a catalyst for more portfolio managers and CIOs to become more involved in the market microstructure and working more closely with the buy side trader,” Liquidnet Corporate Strategy Group member, Vlad Khandros, said.
“We have always said that the buy-side trader is a fantastic source of alpha and can produce a lot more if properly leveraged.”
