Market integrity matters! You can play an important role in keeping our markets clean
Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, December 2015.
- You must notify ASIC if you suspect market misconduct
- In the lead up to Christmas, be on the lookout for 'window dressing'
- Lodging a suspicious activity report is quick and easy – check out the poster!
ASX, Chi-X or APX market participants and crossing system operators must notify ASIC if they suspect market misconduct. To simplify this process, we have created a new form on the market entity compliance system (MECS) and an educational poster.
Suspicious activity reports (SARS) are an important source of information about market misconduct for ASIC. To date, we have received 254 SARs, and the rate at which these are being lodged is increasing.
We conduct inquiries into every SAR we receive. In the first instance, this may involve running reports using specialised surveillance tools. This may be followed by requests for information and interviews in some cases. We keep a record of intelligence gathered during this process for future reference.
Approximately 15% of SARs submitted to ASIC are referred to our market integrity enforcement team for investigation. Most other matters are closed after we determine there is no case to answer or an alternative outcome is appropriate.
Example 1: Suspected insider trading
The client of a participant traded shares in a listed company just prior to the issue of price sensitive announcement by that company. The participant deemed the trading suspicious after learning that the client was an employee of the company. The participant submitted a SAR to ASIC.
We conducted enquiries into the matter. As well as conducting our own analysis, we issued notices to a number of participants and requests to the company in question and an international regulator.
After examining this information, we determined that there was a high chance the client had traded using inside information. The matter was referred to our market integrity enforcement team for further investigation with a view to possible prosecution.
The end of the year can be associated with an increase in unusual trading activity. During this period, we sometimes see orders placed at or near the close of trading which disproportionately impact share prices. This is known as 'window dressing'. It is a form of market manipulation and can impact share price valuations and end of financial year performance figures. It is generally conducted by individuals who have an incentive to manipulate prices in or near reporting periods, such as those who periodically report to clients about investment performance.
Example 2: Suspected market manipulation
The client of a participant traded in a security shortly before the end of the financial year, significantly increasing the share price late in the day. The participant was alerted to this activity after conducting a review of trading across the market on the final day of the financial year. The participant submitted a SAR to ASIC.
What particularly piqued our interest was the fact that the consideration involved represented only a small fraction of the value of the client's overall holding. We conducted enquiries into the matter, including creating a profile of the client's trading behaviour and issuing notices, but were still unable to establish a sound commercial motive for the trading.
We decided to seek an explanation from the client and to explain our concerns about possible market manipulation. The client has since been warned and we are monitoring their trading.
Participants and crossing system operators should take active steps to identify possible misconduct, through system controls and filters and reviews of anomalous trading by designated trading representatives and compliance staff.
If you see or suspect market misconduct you must report it as soon as practicable. Remember, timing is important. SARs must be submitted when you become aware of the conduct, not after you have investigated it.
Lodging a SAR is quick and easy. We recently created Form M57 Suspicious Activity Report on MECS for this purpose. This form guides you through the sorts of information to provide and can be submitted online. Participants who wish to can still submit SARS by emailing email@example.com.
To further assist businesses and their staff comply with this obligation, we have designed an educational poster. We encourage you to print and display it in high visibility locations around your business, such as on trading desks, above the office photocopier and in your lunch room.
ASIC will review suspicious activities that come to our attention in other ways, that we consider should have been submitted as a SAR. Where appropriate, we will consider remedial or disciplinary action in these instances.
Further information about SAR obligations is provided in ASIC Regulatory Guide 238 Suspicious activity reporting (RG 238).