ASIC Market Supervision Update Issue 35

Previous issues

End of year 'window dressing'

ASIC reminds market participants to be alert to unusual trading associated with the end of financial year, which can impact share price valuations and end of year performance figures. Often known as 'window dressing', it refers to orders placed at, or near, the close of trading, or on days leading up to the end of a reporting period, seeking to increase prices of a particular share.

Window dressing is a form of market manipulation, and is generally conducted by parties who have an incentive to manipulate prices in or around Reporting Periods and benefit from this practice. These include investment managers, fund managers, MDA service providers and other portfolio managers, who report to clients in relation to investment performance on a periodic basis. It may also include parties such as large or substantial shareholders and/or directors of listed companies. As such, market participants should be alert to orders placed near the close on trading days leading up to reporting periods, that may impact the end of day price of securities.

ASIC's Market Surveillance team monitors trading of securities which increase in price near the end of reporting periods and has made a number of enquiries in this regard. Some of these enquiries resulted in referrals to enforcement for further investigation.

Market participants ought to be aware of their obligations as gatekeepers, and should take active steps to identify possible misconduct, both by way of system controls and filters, as well as reviews of anomalous trading by designated trading representatives (DTRs) and compliance staff. Should ASIC uncover evidence of window dressing, ASIC's Enforcement team will investigate further, which may result in ASIC Market Integrity Rule or Corporations Act penalties being imposed.

For further information, market participants should consider previous public statements made by ASIC and the ASX:

 

ASIC refines dark liquidity, high-frequency trading rules

ASIC recently announced that it had refined its proposed rules on dark liquidity and high-frequency trading.

Outlined in Media Release 13-142, following extensive industry consultation, the rule changes are, as follows:

In relation to dark liquidity:

  • On minimum size thresholds and tick size reform – not proceed with these proposals at this stage. Instead, ASIC will monitor the impact of the new meaningful price improvement rule that was approved by Minister Shorten in November 2012 and commenced on 26 May 2013. There has already been a decline in the volume of dark liquidity as a result of this rule.
  • On crossing system transparency and disclosure – proceed with the rules but require disclosure of fees and order types to clients only and not require publication of aggregate statistics. Rely on existing rules to disclose crossings on trade confirmations for retail clients, rather than introducing a new rule. Flexibility will be provided for flagging the ‘crossing system’ and ‘as principal’ on trade information for wholesale clients.
  • On crossing system fair treatment – proceed with these rules, but without a fee constraint on client opt-out.
  • On crossing system monitoring and record keeping – not proceed with the enhanced record keeping rule. Proceed with the monitoring rules but clarify that it relates to a crossing system operator's procedures, and should be proportionate to the nature and size of the business, and not necessarily be real-time.
  • On crossing system controls – proceed with rules requiring that all crossing systems comply with core existing requirements for automated order processing, and proceed with requiring notification to ASIC and impacted clients of system outages.
  • On T+3 course of sale reports – proceed as proposed.
  • On enhanced conflict of interest obligations – proceed with the rules to protect client information (with carve outs for client consent) and to prevent intentional interposing between client orders. Not proceed with requiring client orders to receive time priority over principal orders and instead amend the existing rule on fairness and priority in dealing so it applies to crossing systems.
  • On payment for order flow – modify our approach to be limited to negative commissions.
  • On indications of interest – introduce guidance about managing client information.

In relation to high-frequency trading:

  • On small order resting time – given the considerable drop evidenced in small and fleeting orders, ASIC has decided to not proceed with this proposal at this time, but will continue to monitor it, and will reconsider should such orders return to problematic levels.
  • On manipulative trading – our proposal to remove 'materiality', instead to rely on the impact of any order, will not be implemented.

ASIC Commissioner Cathie Armour said that given the work of the ASIC taskforces on high-frequency trading and dark liquidity over the past two years, improvements in the awareness of these areas of trading meant that there was no longer a need at this time, to proceed with some of the rules. ASIC will continue to monitor the space closely, to ensure that regulatory settings ensure an appropriate and measured outcome.

 

New Market Supervision Fees Regulations to apply from 1 July 2013

The Corporations (Fees) Regulations 2001 (the Regulations) are soon to be amended. The invoice statements that market operators and market participants receive in early to mid July 2013 for the quarter ending 30 June 2013 will be the last prepared under the current Regulations.

ASIC will continue to bill quarterly in arrears under the new Regulations effective from 1 July 2013. ASIC expects that the first invoice statements prepared according to the new Regulations will be sent to market operators and market participants in early to mid October 2013.

The key changes that we expect to apply to the Regulations for all relevant stakeholder groups are as follows:

  • ASX, Chi-X and their market participants - Cost recovery allocated to trading activity will reduce, and cost recovery allocated to messaging will increase. This is based on the rationale that order message-related supervision activity has become a material part of ASIC's costs since ASIC's last market supervision cost driver analysis was performed.
  • Market participants of ASX and/or Chi-X - A new quarterly minimum fee of $1,835 per market participant. ASIC's cash equity market participant supervision costs are not wholly variable. Market participants subject to the market integrity rules have a dedicated pool of resources allocated to their supervision, regardless of their trading and messaging activity and the new quarterly fee of $1,835 per market participant reflects this.
  • Other market operators – ASX 24, new quarterly fixed fee $344,670 (previously $386,000); FEX Global Pty Ltd, $49,930; and small financial markets (ie. NSX, SIM, IMB and APX), $8,735 (previously $9,375). In the case of FEX and APX, charges will apply once these markets commence operating.

There will also be amendments to all of the above in relation to the processing of late payment fees, which have been made simpler and more efficient to administer.

More details will be sent to affected stakeholders, shortly after the new Regulations are made.

For more information, see Treasury's consultation webpage ASIC market supervision cost recovery arrangements July 2013 – June 2015. This includes the following documents:

  • a set of draft amendments to the relevant provisions in the Corporations (Fees) Regulations 2001, with explanatory commentary; and
  • a draft Cost Recovery Impact Statement (CRIS) compiled by ASIC that explains in detail the changes to the specific amounts charged and the manner in which the charges are calculated.

 

Markets Disciplinary Panel

On May 31, ASIC announced that Merrill Lynch Equities (Australia) Limited ('Merrill Lynch') had paid a penalty of $120,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel ('MDP'). The penalty was for not ensuring that it had in place:

  • organisational and technical resources for its system for the automated processing of orders, including appropriate automated filters; and
  • processes to record any changes to the filters to enable automated orders to be submitted into the ASX's trading facility, without interfering with the efficiency and integrity of ASX's market or the proper functioning of that facility.

As a result of Merrill Lynch's failure to ensure that it system had in place adequate organisational and technical resources between 1 August 2010 to 24 May 2011, the MPD had reasonable grounds to believe that Merrill Lynch contravened Rule 5.6.3(a) of the ASIC Market Integrity Rules (ASX Market) 2010, and thereby alleged to have contravened subsection 798H(1) of the Corporations Act 2001 ("Corporations Act").

The MDP issued Merrill Lynch with an infringement notice specifying a penalty of $120,000. Consistent with guidance provided in ASIC Regulatory Guide 216 Markets Disciplinary Panel (RG 216), the MDP took various factors into consideration, including that:

  • Merrill Lynch failed to ensure that its organisational and technical resources were such that filter changes to its system could only be made with its knowledge and authorisation, and that any unauthorised changes were promptly detected, rectified and prevented.
  • Merrill Lynch’s failure to ensure that each of these elements were in place had the potential to damage the efficiency and integrity of the market and cause loss to third parties.
  • The contravention occurred over an unacceptable period of time, from 1 August 2010 (when the ASIC market integrity rules commenced) to 24 May 2011 (when the unauthorised change to Merrill Lynch’s system was detected).
  • Merrill Lynch has taken further remedial action to prevent a recurrence of this incident.
  • Merrill Lynch cooperated with ASIC throughout its investigation and did not dispute any material facts.

Further details in relation to the background of this matter can be found in ASIC Media Release 13-129.

Important regulatory information

Pursuant to subparagraph 7.2A.15(4)(b)(i) and (ii) of the Corporations Regulations 2001, Merrill Lynch has complied with the infringement notice. Such compliance is not an admission of guilt or liability, or that Merrill Lynch has contravened section 798H(1) of the Corporations Act.

The MDP is a peer review body that exercises ASIC’s power to issue infringement notices and accept enforceable undertakings in relation to alleged breaches of the market integrity rules.

The market integrity rules are made by ASIC and apply to market operators, market participants and prescribed entities under the regulations. Penalties are determined in accordance with relevant guidance issued in RG 216.

 

Contact ASIC 

Market participants should contact ASIC for market integrity issues and ASX and Chi-X respectively for operational issues. Contact ASIC’s Market and Participant Supervision group on 1300 029 454 and you will have these voice menu options:

  • Option 1 for real time market matters
  • Option 2 for other market related matters
  • Option 3 for Participant enquiries or matters
  • Option 4 for Market wide announcements.

Or you can reach the Market and Participant Team by email market.participants@asic.gov.au, or through your relationship manager.

 

For more information

Please see www.asic.gov.au/market-supervision.

Last updated: 30/03/2021 09:35