ASIC Market Supervision Update Issue 46
Special crossings during takeovers and buybacks and trades with price improvement
ASIC would like to remind Market Participants of their obligation under Rules 6.5.1 and 6.6.1 of the ASIC Market Integrity Rules (ASX Market) 2010 (ASX) and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 (Chi-X), not to effect a special crossing during a takeover or on behalf of the issuer during an on- market buy-back.
Rule 1.4.3 (ASX and Chi-X) defines a 'special crossing' in an equity market product as a block trade or large portfolio trade within the meaning of the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011, entered into other than by matching of orders on an order book of an equity market (i.e. ASX or Chi-X). Rule 4.2.1 (Competition) defines a block trade and Rule 4.2.2 (Competition) defines a large portfolio trade.
Any type of crossing that meets the definition of a block trade or a large portfolio trade, and that is entered into other than by matching of orders on an order book of ASX or Chi-X, is a special crossing. This is the case even if the crossing also meets the definition of a ‘trade with price improvement’ (see: Rule 4.2.3 (Competition)) and is reported to ASX or Chi-X as a trade with price improvement. These special crossings are therefore prohibited during a takeover or on behalf of the issuer during an on-market buyback under Rule 6.5.1 and 6.6.1 (ASX) and (Chi-X).
Further, ASIC notes that specific guidance was previously provided to Market Participants in Issue 39 of the ASIC Market Supervision Update (October 2013) and in paragraph 195 of ASIC Regulatory Guide 223 Guidance on ASIC market integrity rules for competition in exchange markets (RG 223), that trades with price improvement are not considered "in the ordinary course of trading" and therefore not permitted under the Corporations Act 2001 (the Act), for on-market buy-backs on behalf of listed corporations, or under the terms of ASIC Class Order CO 07/422 On-market buy-backs by ASX-Limited schemes, for buybacks conducted by responsible entities of registered managed investment schemes. RG 223.195 also states that a trade with price improvement is not an ‘on-market’ transaction within the meaning of s9 of the Act, and therefore does not fall within the exceptions in Chapter 6 that apply to 'on-market' transactions.
ASIC will continue to identify trades executed by Market Participants that are inconsistent with their obligations under either the Act or the ASIC market integrity rules and will, in appropriate cases, take enforcement action.
Real time short sale tagging rule suspended
ASIC intends to relieve Market Participants from the obligation to comply with Rule 5.12.1 (ASX and Chi-X) relating to 'real time short sale tagging', by way of a class waiver.
Rule 5.12.1 relates specifically to the method of reporting and does not change the existing obligation to disclose short sale transactions. It requires Market Participants to identify, at the time an order is placed, the number of products in the sell order that are short. Rule 5.12.1 was due to come into effect on 28th July 2014.
ASIC is currently working through the implications of this decision for industry. Further details will be provided shortly. If you have any urgent queries, please contact your relationship manager or firstname.lastname@example.org .au.
ASIC reports on review of rule changes affecting dark liquidity
ASIC has released the results of a review of rule changes affecting ‘dark trading’ and their impact on market quality. The meaningful price improvement rule and changes to block tier thresholds were introduced in May 2013.
Our review indicates the trends in dark liquidity that were previously of some concern have discontinued. Report 394 Review of recent rule changes affecting dark liquidity (REP 394) shows:
- fairness issues associated with below block size dark orders stepping ahead of lit orders have been addressed;
- the bid-offer spread is more equitably distributed between parties executing below block size dark trades;
- the meaningful price improvement rule and change in block tier thresholds has not affected bid-offer spreads; and
- participants can now trade smaller blocks away from lit markets where they would have traditionally faced higher market impact costs.
- We saw bid–offer spreads widen during 2013. However, the widening in spreads was driven by increased volatility at the time. After controlling for factors that are known to affect spreads (trading activity and volatility), there has been no material change. Therefore, the meaningful price improvement rule and change in block tier thresholds has not affected bid–offer spreads. We saw bid–offer spreads widen during 2013. However, the widening in spreads was driven by increased volatility at the time. After controlling for factors that are known to affect spreads (trading activity and volatility), there has been no material change. Therefore, the meaningful price improvement rule and change in block tier thresholds has not affected bid–offer spreads.
ASIC Commissioner Cathie Amour said the results supported the changes made in 2013. ‘We are satisfied the current policy settings and rule framework has had the desired effect of improving fairness and addressing the concerning trend of increasing below block size trading and declining block size trading. We do not propose to change the current policy and rules on dark liquidity, but will continue to monitor market developments.’
Commencement of Rule 3.4.3 delayed
Following recent discussions with industry, ASIC has amended the commencement date for Rule 3.4.3 (ASX and Chi-X) from 9 May 2014 to 28 October 2014.
We also intend to revise our guidance on Rule 3.4.3 (ASX and Chi-X), which is published in the form of frequently asked questions on the ASIC website: FAQ Rule 3.4.3 ASX and Chi-X Markets. We do not intend to amend the scope of the Rule. We will advise Market Participants when this guidance has been revised.
Monitoring activities in a crossing system
We wish to remind Market Participants that Rule 4A.5.1 of the ASIC Market Integrity Rules (Competition in Exchange Markets) Amendment 2013 (No. 2) commenced operation on 10 May 2014. This Rule requires Market Participants that operate a crossing system to monitor the use of their crossing system, report breaches to ASIC and maintain records for seven years. The compliance date for this Rule was extended to 10 May 2014 by Class Waiver 13-1073, which also includes useful background information about this rule.
Other market integrity rule changes
Changes to the following market integrity rules will apply from 26 May 2014:
- Extension of existing volatility controls in Chapter 2 of the Competition Rules to equity index future contracts;
- Splitting Capital Rules in APX, ASX, Chi-X, ASX24 and FEX Market Integrity Rules into a separate capital rulebook for each market. The substance of the rules will remain the same. This will reduce administrative costs (e.g. FRLI fees) when we make rule changes to market specific market integrity rules in the future; and
- Housekeeping - for ASX 24 and FEX Market Integrity Rules, ASIC has made concurrent amendments to the manipulative trading rule in ASX 24 (to fix up a missing penalty) and to the manipulative trading rule in FEX (to align it with the new ASX 24 rule).
The new Capital Market Integrity Rules and instruments amending the Competition, ASX24 and FEX Market Integrity Rules are available on our website: ASIC market integrity rules.
ASIC releases Chi-X market assessment report
Earlier this month, we released our market assessment report for Chi-X Australia Pty Ltd (Chi-X). Overall, our assessment concluded that Chi-X met its statutory obligations during the assessment period. As part of our review, we identified three agreed actions that focus on the ongoing improvement in the operation of the Chi-X market. While important, the agreed actions do not detract from our overall conclusion that Chi-X complied with its statutory obligations during the assessment period.
ASIC may conduct annual assessments of market licensees, including Chi-X, under s794C of the Corporations Act. The scope of our assessment can include any or all of the statutory obligations of a market licensee, for example, the obligation under s792A(c), which requires the market licensee to have adequate arrangements for operating the market, including arrangements to manage conflicts of interest and monitor and enforce compliance with the operating rules.
ASIC publishes equity market data
ASIC recently published equity market data for the quarter ending 31 March 2014. In summary, we observed that:
- over the March quarter 2014, the ASX accounted for 86% of the total dollar turnover in equity market products. Chi-X accounted for the remaining 14% of total dollar turnover. These figures include all trades executed on order book, as well as trades matched off order book and reported to either market operator;
- overall daily turnover in the equity market averaged $4.8 billion over the quarter. The average trade size remained unchanged at $5,300 from the previous quarter. The weighted average quoted bid–ask spread for securities in the ASX 200 index fell marginally to around 14 basis points of the midpoint price. The weighted average quoted bid–ask spread for all securities also dropped to just below 21 basis points of the midpoint price. Quarterly average intraday and interday volatility was lower in the March quarter;
- the overall order-to-trade ratio declined to 8.1:1 in the quarter. Decreasing order activity on Chi-X contributed to a fall in its order-to-trade ratio, while ASX’s ratio remained the same; and
- below block size dark liquidity represented 11% of total value traded in the March quarter, which remains unchanged compared to the previous quarter, and is still well below its share of the market a year prior (16%). Turnover in block size dark liquidity was just above 15% of total value traded, representing a decrease from the previous quarter (17%).
For a full explanation of the data see Equity market data for March quarter.
Markets Disciplinary Panel
On 6 May 2014, ASIC announced the payment of the following penalty by a market participant for an infringement notice issued by the Markets Disciplinary Panel (MDP).
D2MX Pty Ltd
D2MX Pty Ltd (D2MX) has paid a total penalty of $110,000 to comply with an infringement notice given to it by the MDP. The penalty was for:
- failing to ensure that its Automated Order Processing (AOP) system had in place organisational and technical resources, including having a 'price movement from last' automated filter and processes to record any changes to the automated filters, which interfered with the efficiency and integrity of the ASX market and the proper functioning of the Trading Platform; and
- failing to prevent the entry into the Trading Platform of an erroneous Order which resulted in a market for BHP Billiton Limited exchange traded March 2012 $43.51 put options not being both fair and orderly.
By reason of its conduct, the MDP had reasonable grounds to believe that D2MX had contravened Rule 5.6.3(a) (ASX) and Rule 5.9.1 (ASX), and thereby contravened subsection 798H(1) of the Act which requires compliance with the market integrity rules.
In determining this matter and the appropriate penalty to be paid, the MPD took into account the guidance in RG 216 and noted in particular the following:
- One course of conduct resulted in two breaches of the market integrity rules, being one breach of Rule 5.6.3(a) and one breach of Rule 5.9.1;
- The breaches were of a serious nature;
- Rule 5.6.3(a) is aimed at promoting confidence in the integrity of the market. Ensuring that Trading Participants with AOP systems have in place adequate organisational and technical resources to operate without interfering with the efficiency and integrity of the Market or the proper functioning of the Trading Platform, is critical in maintaining the integrity of the market. This includes having appropriate filters, filter parameters and processes to record any changes to filters or filter parameters;
- Appropriate automated filters are essential components of DMA AOP systems used by clients of Trading Participants. Appropriate automated filters are in place to ensure Orders are submitted into the Trading Platform without interfering with the efficiency and integrity of the Market or the proper functioning of the Trading Platform. Processes to record any changes made to automated filters serve an important AOP system risk mitigation function;
- D2MX failed to ensure that at all times its AOP system had in place or had activated appropriate automated filters, and failed to ensure that it had in place processes to record any changes to the automated filters. The failure of D2MX to ensure that its AOP system had these safeguards in place risked undermining public confidence in the integrity of the market;
- If, for whatever reason appropriate automated filters are deactivated or otherwise unavailable, then a Trading Participant's system must not be used for AOP, instead Orders should be submitted for entry into the Trading Platform through a DTR or not be submitted at all. Notwithstanding this, the MDP noted the difficulty in setting appropriate automated filters for options orders;
- Additionally, it is unacceptable for Trading Participants to deactivate or otherwise make changes to their automated filters without being in a position to record any changes made including the reasons underlying any changes made;
- D2MX's conduct of deactivating the 'price movement from last' AOP filter on the client's account was deliberate, and thereby conduct of an intentional type;
- D2MX took action to prevent recurrence of the breaches on 29 March 2012 at a time after the Relevant Transactions, by reactivating the 'price movement from last' AOP filter on the Client's account;
- Rule 5.9.1 is aimed at promoting confidence in the integrity of the market. Imposing a strict obligation on market participants not to do anything which results in a market for a product not being both fair and orderly, is critical in maintaining the integrity of the market;
- The misconduct had the potential to damage the reputation and integrity of the market, as the entry of the relevant order into the ASX Trading Platform caused the price of BHPUL9 to decrease from the last traded price of $9.23 to $0.06, being a 99.3% decrease;
- D2MX did not derive any actual or potential benefit from the breaches;
- D2MX had no history of non-compliance with the market integrity rules or ASX Market Rules, including no previous contraventions found against it by the MDP;
- D2MX co-operated with ASIC throughout its investigation and did not dispute any material facts; and
- D2MX agreed not to contest the matter, thereby saving time and costs that would otherwise have been expended.
Further details about this matter can be accessed using this link: MDP Infringement Notices Register.
Important regulatory information
Pursuant to subparagraph 7.2A.15(4)(b)(i) and (ii) of the Corporations Regulations 2001, D2MX has complied with the respective infringement notice. Such compliance is not an admission of guilt or liability, and D2MX is not taken to have contravened subsection 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. Infringement notices for this and other matters can be accessed using this link: MDP Infringement Notices Register.
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