Fifth anniversary of ASIC market supervision
Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, August 2015.
On 1 August 2010, ASIC assumed responsibility for the supervision of real-time trading on Australia's domestic licenced equities and futures markets from the ASX. This meant that for the first time in Australia, responsibility for market supervision and market enforcement lay within the same agency. This month marks the fifth anniversary of this milestone.
Over the past five years the nature of the markets ASIC supervises has changed dramatically and the scope of its responsibilities increased. ASIC has not only kept pace with the speed this transformation, it has implemented world leading technologies and achieved significant efficiencies during this period. Throughout all of this, our priority has remained the same – to promote investor trust and confidence through fair, orderly and efficient markets.
The transfer of market supervision enabled the introduction of competition in equity trading in Australia. Chi-X commenced operating its financial market on 31 October 2011. This was followed by the introduction of a range of new trading platforms, products and order types on both the ASX and Chi-X markets.
ASIC quickly adapted to the multi-market environment. This included acquiring the tools and developing the processes to collect and consolidate market data from multiple sources to create a single view. Today, ASIC supervises 125 market participants (participants), trading across seven equities and futures markets, on which securities of more than 2,000 listed entities are traded, and more than 960,000 trades made per day (compared with 520,000 in 2010).
The past five years have seen a fundamental change in the way ASIC approaches markets analysis. We have moved away from a legalistic and process-based approach towards work that is increasingly based on thematic analysis. In addition, there has been a shift from desktop reviews to on-site reviews and risk-based oversight. A key feature of our revised approach is the use of data analytics to assist with policy formulation. The use of data analytics ensures that policy decisions are based on identifiable and measurable market outcomes. Our approach to markets analysis enables us to more specifically target our surveillance activity.
In 2013, ASIC replaced the SMARTS surveillance system with the Markets Analysis and Intelligence (MAI) surveillance system. Using MAI, the time taken to conduct searches of trading activity has been reduced from months or weeks to minutes (in some instances). MAI's enhanced functionality means that trade monitoring and post-trade analysis can now be conducted by three less staff than before.
ASIC has introduced several new features to MAI since its implementation, including the incorporation of enhanced regulatory data. These features have enabled us to reduce the number of notices we issue to participants by almost half since 2011. Not only are the number of notices we issue lower (and continuing to fall), they are more specific and targeted. Participants have told us that they require approximately 30% less time to respond to.
Identification and investigation of suspicious conduct
In 2013, ASIC introduced the suspicious activity reporting (SAR) rule. This rule requires participants of the ASX and Chi-X to notify ASIC if they suspect that a person is engaging in manipulative trading behaviour. Since then, ASIC has received a total of 214 SARs, with the number of reports increasing each year. The importance of this initiative for the identification of suspicious conduct is reflected in the fact that approximately 15% of SARs submitted to us have been referred to our Enforcement team for investigation.
MAI has given us far greater visibility of individual traders and trading behaviour and significantly, immediacy of information. As a result, there has been a significant reduction in the time taken to commence investigations into suspicious conduct. MAI has also enabled us to reduce the time taken to assemble evidence by using tagging, market replay and enhanced reporting capabilities. In one case, this functionality reduced the time taken to compile evidence from an estimated 5 weeks to two weeks.
Prior to 2010, the period between identifying market misconduct and commencing a formal investigation in Australia was in excess of 3 months. Since the transfer of supervision this time has halved to 6 weeks, and in many serious cases investigations are commenced within days of identifying market misconduct issues. This allows investigators to secure evidence prior to its possible destruction or accidental deletion and to commence questioning interested parties sooner. Overall, there has been a 23% reduction in the time between ASIC first becoming aware of misconduct to handing the matter over to the Commonwealth Director of Public Prosecutions.
ASIC's enhanced ability to prosecute market misconduct is evidenced by the number of successful markets enforcement outcomes we have achieved in the last five years when compared to the previous five year period. Moreover, ASIC has increased the number of enforceable outcomes achieved despite a 15% reduction in Market Integrity Enforcement staff.
One of the key reasons ASIC has been so successful in this respect is the structural and physical co-location of our surveillance and enforcement teams. In many overseas jurisdictions, market operators are still responsible for undertaking market surveillance, which requires them to identify suspected market misconduct and conduct initial enquiries, before referring matters to securities regulators.
Markets Disciplinary Panel (MDP)
The MDP was established by ASIC in 2010 in response to requests from participants for an independent peer review body to determine alleged breaches of the ASIC market integrity rules. The MDP consists of part-time members with relevant business or professional experience.
Since September 2011 (when the first MDP decision was published), the MDP has issued thirty-seven infringement notices, resulting in total pecuniary penalties of $2,304,800. All of these notices have been complied with (including for contested matters). This is indicative of the high level of support among participants for the MDP.
On 1 August 2010, ASIC also assumed responsibility for monitoring participant conduct. ASIC's interaction with participants is based on a relationship management model. Practically, this means that participants have more engagement with ASIC in their day-to-day operations than before. Over the past year, ASIC's market supervision team has conducted 251 industry meetings, including 99 compliance liaison meetings with participants, and a further 25 risk assessment meetings completed.
In July 2015, ASIC implemented the Market Entity Compliance System (MECS), part of ASIC’s industry-funded Flexible Advanced Surveillance Technologies (FAST) program. MECS is an on-line communications portal which has been designed to provide market entities with tools and information to help them comply with their regulatory obligations.
It is an example of ASIC using technology to assist market entities comply with the law.
The success of this model of participant engagement in achieving regulatory compliance is reflected in the fact that complaints against participants represent less than 1% of the more than 20,000 disputes accepted by the Financial Ombudsman Service each year.
 This figure is based on equity market data for the March 2015 quarter, see http://asic.gov.au/regulatory-resources/markets/market-structure/equity-market-data/. The total number of trades per day in the September quarter of 2010 was 520,370.
 From 28 July 2014, participants are required to provide specific data on orders to market operators, who must record and provide to ASIC all regulatory data they receive.
 Compliance with an infringement notice is not an admission of liability, nor does it represent a finding that the market integrity rules have been contravened: see ASIC Regulatory Guide 216.65 Markets Disciplinary Panel.
 In FY2013/2014, the Financial Ombudsman Service accepted 23,454 disputes, of which only 42 related to participants.