Instinet Australia Pty Ltd (ACN 131 253 686) (Instinet) has paid a penalty of $670,500 to comply with an infringement notice given by the Markets Disciplinary Panel (MDP).
The infringement notice related to market integrity rules requiring Instinet to:
- Provide meaningful price improvement for client transactions conducted off-market;
- Disclose all necessary information to its clients about its crossing system; and
- Accurately report regulatory data about the execution venue of trades.
Instinet operated a crossing system, often referred to as a ‘Dark Pool’, called BLX Australia (BLX crossing system) from 1 April 2011 until it was suspended from operation by Instinet on 11 October 2022.
The MDP believed that Instinet contravened Rule 6.1.1 of the Rules as, between 1 January 2021 and 11 October 2022, the BLX crossing system was incorrectly referencing the ASX best bid and offer, rather than the National Best Bid and Offer (NBBO). During this period, 3,093 trades matched off-market and reported as Trades with Price Improvement, did not provide meaningful price improvement over the NBBO for clients. The trades were valued at $13.48 million.
The MDP believed that Instinet contravened Rule 5A.2.2 of the Market Integrity Rules by failing to provide clients with all necessary information about the operation of the BLX crossing system.
The MDP determined that allowing users to indicate their interest to trade, even if only visible to Instinet, falls within the term ‘Indications of Interest’ as contemplated by Rule 5A.2.2(5) of the Rules (and the preceding Rule 4A.3.2 of the Competition Rules) and should have been disclosed to clients. By not making the disclosure, Instinet was not being transparent about the use of indications of interest with its clients.
Additionally, the MDP believed that Instinet contravened Rule 7.4.2 of the Rules as, between 1 January 2021 and 31 January 2023, Instinet incorrectly reported the BLX crossing system as the execution venue for 940 transactions where these transactions were executed off-market but not on the BLX crossing system.
The MDP considered Instinet was negligent as it should have had procedures in place to prevent or detect possible non-compliance with the Rules applicable to crossing systems.
The MDP also considered that Instinet failed to update its systems in line with market changes and in doing so failed to act in its clients’ interests. As a licensed market participant, Instinet should have had systems and controls in place regarding the configuration and periodic review of critical trading technology systems and to ensure their ongoing integrity and compliance with the Rules. The MDP said that Instinet’s failure to update its system in response to market changes indicated ‘poor market awareness and a ‘set and forget’ approach’ to compliance.
Compliance with the infringement notice is not an admission of guilt or liability and by doing so, Instinet is not taken to have contravened subsection 798H(1) of the Corporation Act.
Background
Rule 5A.2.2 imposes an obligation on a market participant operating a crossing system to give Non-Public Crossing System Information to each client before accepting an order from that client for the first time. ASIC’s Regulatory Guide 265 Guidance on ASIC market integrity rules for participants of securities markets states that it is important that clients of a market participant operating a crossing system understand the operating procedures of the crossing system.
Rule 6.1.1 prohibits market participants from entering into transactions away from the lit market unless a relevant exception applies. This pre-trade transparency is fundamental to price formation. The Trade with Price Improvement exception balances the benefit to clients with the importance of price formation by requiring that these trades offer meaningful price improvement to clients.
Rule 7.4.2 requires market participants to provide certain regulatory data to a market operator. To monitor developments in market structure, including off-order book liquidity (or liquidity in ‘dark pools’), and to efficiently conduct surveillance activity, ASIC requires unique identification of the execution venue for transactions executed away from a licensed market.
Instinet is a wholly owned member of the Nomura group of companies and a market participant of markets operated by ASX Limited and Cboe Australia Limited (formerly Chi-X Australia Pty Ltd).