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Clifford Chance

Clifford Chance


Consultation on new regulatory framework for electronic trading

26 July 2012

On 24 July 2012, the SFC published a consultation paper commencing a two month consultation on a proposed regulatory framework for electronic trading, including internet trading, direct market access (DMA) and algorithmic trading.

Electronic trading has been under active scrutiny by the SFC for some time. The regulatory focus is typically on whether there are sufficient controls and safeguards around the trading systems to prevent market manipulation or the creation of a disorderly market. In the case of DMA or internet broking, the concern is whether there are sufficient safeguards to prevent a client using an intermediary's infrastructure and market access for an abusive purpose. In the case of high-frequency and algorithmic trading, the regulatory enquiry is often whether there are sufficient safeguards to prevent market disorder or distortion as can occur, for example, when a high-volume of trades executed through an
algorithm are not responsive to a lack of liquidity in target shares.

The SFC's proposals reflect these focus areas. The requirements are prescriptive, specific and are centred on systems and controls. The specific proposals are summarised below.

The proposed changes will apply to any licensed intermediary that electronically trades listed securities or futures through automated systems, whether for its clients or on its own account. This includes fund managers who conduct electronic trading for collective investment schemes which they manage. Electronic trading is defined as "the trading of securities and futures contracts electronically, and includes internet trading, DMA and algorithmic trading". The definition is broad and therefore potentially unclear but, the apparent intention is that these additional controls apply where orders are processed through automated systems without significant human intervention.

The consultation closes on 24 September 2012.

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