By Jane Wardell
SYDNEY, Nov 20 (Reuters) - The Australian government introduced new market trading rules, including a "kill switch", on Tuesday to protect investors from volatility caused by controversial super-fast computer-driven trading.
The government also launched further inquiries into high frequency trading and so-called dark pool trading, which allows shareholders to trade amongst themselves away from the main "lit" market without revealing their identity or display prices.
Electronic trading has come under global scrutiny since it was blamed for the "flash crash" in the Dow Jones Industrial Average in May 2010 when the index plunged 1,000 points, or 9 percent, and regained most of those losses in less than 20 minutes.
The Australian government's package of new market integrity rules includes the use of "kill switches" which could be used to immediately stop computer-generated, or algorithmic, trading in the event of sudden or untoward market movements.
The rules, which were recommended by the Australian Securities and Investments Commmission, also require dark pools to offer a "meaningful price improvement" over the traditional "lit" market.
"These new rules will help to reduce the risk of market volatility from high frequency trading and provide increased investor protection for retail investors and others trading in dark pools," Financial Services Minister Bill Shorten said in a statement.
The U.S. Securities and Exchange Commission is mulling the effectiveness of "kill switches" as part of a broad review of technology issues after a major glitch at Knight Capital on Aug. 1 that led to a $440 million trading loss that nearly bankrupted the firm.
The error was the third high-profile technology problem experienced by major market players this year. The first hit BATS Global Markets during its attempt at an initial public offering, and the second major glitch plagued Nasdaq during Facebook's market debut.
In Australia, ASIC is looking into a spike in the price of several major stocks in the benchmark S&P/ASX 200 index at the start of trading one day last month.
High frequency trading, which allows traders to buy and sell stocks at microsecond speed using automated systems, accounts for 30 percent of all daily business on the Australian Stock Exchange and the bourse's managing director, Elmer Funke Kupper, said in a statement he supported the new rules.
Both the ASX and rival Chi-X, owned by Nomura Holdings Inc , will be required immediately to enforce an extreme trading range rule, aiming at preventing prevent wild swings in securities.
The other rules will come into force over six to 18 months.
Shorten also launched two task forces to further probe the impact of dark pools and high frequency trading on the integrity and quality of the markets.
There are currently 15 dark pools registered with ASIC, most run by large mulitnational broker firms.
ASIC has proposed a A$50,000 minimum threshold for share trading in dark pools, while the ASX has suggested a A$25,000 threshold. All share trades under the minimum threshold would be directed to the public "lit" market.
The task forces are due to report back to the government in March.