Market Integrity Update - Issue 130 - September 2021

Issue 130, September 2021

Our priorities for supervising market intermediaries in 2021–22

We recently published our priorities for supervising market intermediaries in 2021–22, informed by the strategic priorities in the ASIC Corporate Plan 2021–22. We’re focusing on:

  1. reducing the risk of harm to consumers
  2. supporting enhanced cyber and operational resilience
  3. maintaining high industry standards
  4. enhancing our market surveillance and data analytics.

We recognise that market intermediaries are facing many current challenges, including from the impacts of the COVID-19 pandemic and several important legislative reforms taking effect this financial year. We’re adapting our work program to reduce the number of reviews of market intermediaries and providing regulatory relief where appropriate.

We encourage you to plan for the year ahead by assessing your governance framework against these priorities.

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Social media led pump and dump stocks

We’ve noted a concerning trend of social media posts being used to coordinate pump and dump activity, which may amount to market manipulation in breach of the Corporations Act 2001.

This activity impacts on market integrity and can harm investors who buy a stock just before the promoters sell out and the price falls, resulting in significant losses.

We expect market participants (participants) as gatekeepers to take active steps to identify and stop potential market misconduct, both through pre-trade filters and post-trade reviews of trading. Where participants have seen unexplained price movements, they should also consider if there is discussion on social media or other channels that may be suggestive of a coordinated plan to manipulate the market.

Participants should consider the circumstances of all orders as required under the manipulative trading provisions in Rule 5.7.2 of the ASIC Market Integrity Rules (Securities Markets) 2017, and to be aware of indicators of manipulative trading including:

  • coordinated trading by clients (timing, location and IP addresses) in volatile stocks
  • possible misinformation, pump and dump activity or layering of the order book
  • clients who aggressively cross the spread and ignite momentum
  • clients wanting to trade stocks that are running on no news
  • clients whose transaction activity is inconsistent with their history and profile.

Participants should be on the lookout for groups of clients who trade in the same stock, in the same direction and around the same time. They may have opened accounts at a similar time, be referred by the same person, have the same account contact details, or transfer funds between themselves.

We expect participants to promptly submit suspicious activity reports where they see this type of activity.

We’re continually monitoring the market for this type of activity and proactively warning investors about the risks of participation.

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Consulting on payment for order flow rule amendments

We’re consulting on amendments to the ASIC Market Integrity Rules (Securities Markets) 2017 (the Rules) that are intended to avoid the emergence of payment for order flow arrangements in Australia.

We’ve identified that the Rules do not deal with certain payment for order flow scenarios such as arrangements between non-market participant intermediaries. Consultation Paper 347 Proposed amendments to the prohibition on order incentives in the ASIC market integrity rules (CP 347) proposes to close this regulatory gap.

Payment for order flow is not prevalent in the Australian equity market. However, we’ve observed continued growth in other markets (mostly the United States). There’s also increasing scrutiny of payment for order flow by other regulators.

Payment for order flow arrangements create conflicts of interest that can lead to poor client outcomes. It can also negatively impact market liquidity and pricing. In our view, these harms outweigh the benefits.

Our proposed amendments are a proactive measure intended to avoid the emergence of payment for order flow arrangements in Australia.

We welcome your feedback on CP 347 by 3 November 2021.

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AOP annual review and notification reminder

We remind trading participants who operate automated order processing (AOP) systems of their obligation to have an appropriately qualified person undertake an annual review of relevant documentation, for compliance with Part 5.6 of the ASIC Market Integrity Rules (Securities Markets) 2017 (the Rules). You must then provide an annual notification to ASIC under Rule 5.6.8B by 15 November 2021.

When referring to relevant documentation, we remind participants that to maintain ongoing compliance, system testing and change management is a key function of the operation of all AOP systems.

All notifications must be in writing, signed and dated by two company directors of the trading participant (as reflected in ASIC’s records), and set out:

  • the full legal name of the trading participant
  • the name and version number of the AOP system or systems to which the notification relates as listed on the initial certification letter (e.g. not an alternative internal name)
  • confirmation by the trading participant that nothing has come to their attention during the 12-month period from 1 November 2020 to 31 October 2021, which would indicate they’re unable to comply with Part 5.6 of the Rules
  • the names of the company directors signing the annual notification.

We’ll accept a single annual notification from trading participants who have multiple AOP systems and/or AOP systems that are certified for use across multiple markets/operators, provided that each system, market and/or operator (as applicable) is identified.

To ensure all minimum requirements are met, we recommend that you provide your annual notification on company letterhead, in the form in Appendix 2 to Regulatory Guide 241 Electronic trading (RG 241). We encourage you to provide this notification using Form M62, available on the MECS portal, which includes instructions on how to complete and lodge the notification.

If you’re no longer providing an annual notification for an AOP system because it has been decommissioned, contact your Intermediary Supervisor or email Market.Participants@asic.gov.au.

For more information, see:

  • Rule 5.6.8B of the Rules
  • RG 241 Electronic trading (RG 241.105 – 241.112)
  • RG 241 Electronic trading (RG 241.166 – RG 241.180).

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Complying with regulatory data obligations

We remind market participants of their obligations to provide accurate and complete regulatory data under Part 7 of the ASIC Market Integrity Rules (Securities Markets) 2017 (the Rules).

This data is used for market surveillance and to calculate the levies paid by securities dealers that trade through market participants under ASIC industry funding. Errors in the content or format of the ‘Intermediary ID’ field, which is required under Rule 7.4.4, may impact the levies paid by your clients.

You should check that the data you have provided is accurate and your arrangements for recording and reporting the data are appropriate and effective. You should report any errors relating to the ‘Intermediary ID’ field to your Intermediary Supervisor at ASIC and consider any breaches of Part 7 of the Rules in the context of your breach reporting obligations under section 912D of the Corporations Act 2001.

In recent years, we’ve issued a number of infringement notices to address non-compliance with regulatory data obligations. Failure to comply with Rule 7.4.2 can attract a penalty of up to $3.15 million.

For more information about your obligations to provide regulatory data on orders and trades, see:

  • Regulatory Guide 265 Guidance on ASIC market integrity rules for participants of securities markets
  • FAQ A1 Is there additional guidance that can be provided by ASIC in relation to the regulatory data requirements.

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Last updated: 22/09/2021 08:45