Australia’s Securities and Investments Commission (ASIC) is seeking input on proposed modifications to its market integrity rules in response to concerns that the integration of artificial intelligence (AI) with algorithmic trading could heighten market volatility and contribute to flash crashes.
In today’s trading landscape, systems for trading, order management, and market surveillance have become extensively automated. ASIC estimates that algorithmic trading accounts for about 85% of all transactions in the Australian equities markets, while the figures rise to approximately 94% in SPI 200 futures and 46% in three-year Treasury bond futures.
The regulator has highlighted that during periods of increased market volatility, financial markets are particularly susceptible to risks stemming from unexpected trading activities driven by algorithms or AI. Such risks may be magnified when AI is utilized alongside algorithmic trading, potentially leading to exacerbated market fluctuations or flash crashes. Furthermore, the intricate nature and lack of transparency in AI models can complicate the understanding of their decision-making processes, which raises the risk of unforeseen consequences.
ASIC’s proposed amendments would broaden the principles-based rules governing trading systems to encompass the development, testing, implementation, and monitoring of trading algorithms. Additionally, the proposals include the introduction of mandatory “kill switches” that would allow for the immediate suspension of any anomalous trading activities initiated by algorithms.
The commission also intends to eliminate certain outdated rules and reduce procedural complexity as part of its efforts to streamline the Market Integrity Rules (MIRs), such as removing the requirement for annual notifications regarding automated order processing.
Feedback on these proposals is requested by October 22.