Trade speeds in nanoseconds are forcing regulators to adopt new enforcement measures.
ASIC commissioner Shane Tregilis yesterday (23 August) told a corporate law conference in the Supreme Court of NSW that the "dramatic" increase in speed and reach of trading called for better access to expert evidence in market misconduct prosecutions, and stronger guidance for professional advisors acting on M&A and corporate transactions.
With the move to fully electronic markets and increasing IT savvy facilities, Tregilis said the challenge for ASIC was to keep up with how new developments in technology might facilitate new forms of market misconduct.
"We're facing all sorts of new issues that we haven't as regulators had to think about. Issues such as latency - the time delay between when a message is sent from one computer to another - and clock synchronisation take on new importance. In Australia we are seeing new types of participants called high frequency traders, said Tregilis.
With the ASX trading engine now capable of processing one trade every 300 micro-seconds, or one-millionth of a second, the world of market trading is a long way from the noisy trading floors of the 18th, 19th and 20th centuries where tickets were physically stamped.
Some overseas markets are capable of trading at 250 micro seconds and the latest discussion predicts nano seconds will soon follow.
While ASIC accepts the current laws are still applicable, Tregilis said the regulator was focused on ensuring market participants had proper controls in place to ensure compliance with law and regulation as well as 'real time surveillance' and follow up investigation on detected market misconduct.
But detection, Tregilis said, was a challenging issue, along with requirements for 'expert evidence' in proving misconduct in court cases to the requisite standard of proof.
"The courts send a clear message that they prefer practitioners rather than academics [to give expert evidence] so that further limits the available pool ...I'm not sure many practitioners relish the prospect of vigorous cross examination by counsel in such cases. The remuneration for doing this is not large and the reputation impact if you get it wrong is considerable. The task is not made easier by the fact that they're often asked to give opinion evidence about a hypothetical inquiry," said Tregilis.
With the industry now moving to diverse pools of liquidity, styles of trading and clientele, Tregilis said there was room for lawyers and other professional advisors to improve their practices.
While ASIC doubled its insider trading investigations this year, Tregilis said there was currently very little guidance on common good practice standards for professionals advising on confidential corporate transactions.
"This is a clear gap in the market...We look to the industry to provide guidance that meets good international and best practice standards in this area," he said.