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16-249MR Review of Australian equity market cleanliness
A review by ASIC has found an overall improvement in the measures of cleanliness in the Australian listed equity market over the past decade.
Report 487 Review of Australian equity market cleanliness, looked at possible insider trading and information leakage ahead of material, price-sensitive announcements (material announcements) by analysing price movements or shifts in trading behaviour before these announcements. The results of the review suggest that insider information and the loss of confidentiality ahead of material announcements has declined over the period.
The review used two measures of market cleanliness to come to this conclusion:
- an established market cleanliness measure that has been widely applied in regulatory and academic settings, and
- a new market cleanliness measure developed by ASIC.
In a clean market, security prices should instantaneously react to new information released through the proper channels. Abnormal price movements and anomalous trading patterns ahead of announcements may indicate an ‘unclean market’. Measuring abnormal price movements forms the basis of the established market cleanliness measure.
The new market cleanliness measure developed by ASIC examines timely and profitable trading before material announcements. It compares the trading behaviour of individual accounts to their historical trading behaviour and the trading of others in the market. Anomalous trading behaviour before an announcement is a significant indicator of confidentiality being breached or compromised.
Based on the new measure, 95% of material announcements exhibited no (or negligible) anomalous trading patterns ahead of an announcement in the period 1 November 2014 to 31 October 2015.
ASIC developed the new measure by leveraging its advanced surveillance system and data analysis capabilities.
The review found:
- a general improvement in market cleanliness for the 10-year period from 1 November 2005 to 31 October 2015, and
- the established and new market cleanliness measures are positively correlated with each other, suggesting that the established method is useful for trend analysis.
Independent international research ranks Australia market cleanliness favourably compared to other developed equities markets.
ASIC Commissioner Cathie Armour said the measure of market cleanliness was important to provide an overview of market integrity, one of ASIC's primary responsibilities.
'Market integrity is fundamental to well-developed financial markets. Given the significance of market integrity to financial markets and the broader economy, ASIC's strategic priority of ensuring fair and efficient markets is vitally important', she said.
'We have seen a gradual improvement in market cleanliness indicators over time and across different segments of Australia’s listed equities markets. ASIC will continue to monitor market cleanliness and enhance our surveillance and enforcement capabilities against market misconduct.'