Principal trading and facilitation

Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, November 2015.

 If you engage in principal trading and facilitation, you should ensure that:

  • principal and facilitation traders are restricted from accessing the client order book (except information specific to a client order that is necessary to complete a trade)
  • situations where staff hold dual roles (such as DTR and institutional sales) are avoided
  • additional controls are put in place if active facilitation is undertaken
  • remuneration arrangements for staff engaged in principal trading and facilitation do not create incentives for inappropriate behaviour, and
  • internal compliance and supervision arrangements are adequate.

For more information about ASIC's expectations, read REP 452: High frequency trading and dark liquidity.

In October 2015, ASIC released Report 452: Review of high-frequency trading and dark liquidity (REP 452). Among other topics, REP 452 examines principal trading and facilitation. This is a high risk area for conflicts of interest, inappropriate handling of confidential information, insider trading and market manipulation. ASIC wants to ensure that market participants appreciate these risks and take steps to manage them.

ASIC's 2012 dark liquidity taskforce identified differences in participants’ approaches to principal trading and facilitation. Consequently, we decided to re-visit this issue in our 2015 review. In doing so, we consulted with a range of parties who provide or use principal trading and facilitation, including:

  • participants actively engaged in providing facilitation services, and
  • buy-side institutional investors who are regularly offered (or make use of) facilitation services.

We observed that many buy-side firms value the execution certainty, liquidity and reduced signalling risk that facilitation may provide. While some buy-side firms provide consent for facilitation traders to have access to some of their unexecuted order information in order to provide improved risk pricing, they also raised concerns about the use of active facilitation and non-genuine indications of interest.

Participants use a range of physical and technological segregation or separation to protect confidential information. Some participants provide their facilitation traders (both passive and active) with access to unexecuted order information and sit them in close proximity to the sales desk. Some facilitation traders also perform other roles that provide them with access to the order book, such as designated trading representatives (DTR) or institutional sales. We refer to these as 'dual roles'. However, other participants have dedicated facilitation traders who are technologically segregated and sit at a separate desk to the sales traders and DTRs.

To manage the inherent conflict of interest involved in principal trading and facilitation, ASIC considers that all principal and facilitation traders should be restricted from accessing confidential information in the unexecuted client order book. An exception may be made for information specific to a client order that is necessary to complete an individual trade following a request from the desk or a client. It is also appropriate to have restrictions in place for access to internal meetings where client orders or trading intentions may be discussed.

In ASIC's view, the conflict of interest facing staff with dual roles (that provide them with access to unexecuted order information) is too great to be managed through traditional methods, such as disclosure or controls. This is particularly the case for active facilitation. In these circumstances, additional controls (including physical separation) should be put in place to manage the conflicts and conduct risk. 

Participants must be particularly mindful of the potential for insider trading and market manipulation when in receipt of confidential information regarding client orders or trading intentions, and must ensure this information is effectively protected.

ASIC expects all participants to have appropriate compliance and supervision arrangements in place for their facilitation activities which cover:

  • managing conflicts of interest, staff trading, insider trading and market manipulation, information barriers, allocation policies, trader mandates and employee remuneration
  • periodic reviews of facilitation activities to test that the policies and procedures are being adhered to and to identify areas for improvement
  • periodic training to reinforce the requirements of the policies
  • post-trade monitoring of facilitation trading to test for matters such as potential front running, wash trades, profitability of trading, market manipulation and insider trading
  • clear responsibilities for responsible executives and management about the supervision of facilitation activities, including the conduct and culture of the trading desk and how to escalate issues that arise, and
  • conflicts of interest and wall crossing registers, and maintenance of restricted lists.

Participants should review the appropriateness of their remuneration structures for staff engaged in principal trading and facilitation, and ensure that they do not incentivise inappropriate behaviour: see RG 181.38 in Regulatory Guide 181 Licensing: Managing conflicts of interest. They should consider adopting a ‘balanced scorecard’ approach that includes a range of criteria and provides material weight to factors such as client satisfaction and acceptable compliance behaviours.

ASIC expects participants to review their existing practices for principal trading and facilitation and implement any necessary changes by 30 June 2016.

Last updated: 10/08/2021 11:21