What does 'market integrity' mean?
Published by the Australian Financial Markets Association in the Policy and Markets Brief, October 2015.
The Markets Disciplinary Panel (MDP) recently articulated the meaning of 'market integrity' in an infringement notice involving alleged market manipulation. This is the first time that the MDP has publically expressed its understanding of this concept. Although the MDP's comments relate to a specific set of facts, ASIC anticipates that they may have broader relevance for market misconduct matters.
In the matter in question, the participant was alleged to have breached Rule 5.7.1(b)(i) of the ASIC Market Integrity Rules (ASX Market) 2010, which provides that:
A market participant must not make a bid or offer for, or deal in, any products on account of any other person where the market participant intends to create a false or misleading appearance of active trading in any product or with respect to the market for, or the price of, any product.
Evidence before the MDP established that the participant commenced a buyback on behalf of a client. The DTR responsible for executing the buyback had discretion regarding the price, volume and timing of the bids entered. While the DTR may initially have made the bids for the genuine purpose of conducting the buyback, the MDP was satisfied that over a two month period (and possibly longer) he believed that the client wanted him to support the price of the product, and entered bids with this intention.
A detailed analysis conducted by ASIC (and submitted to the MDP) identified trading activity which was consistent with an intention to ensure that the closing price of the product did not fall below a predetermined level. This was especially concerning given that closing prices provide a daily reference point which represents the latest market valuation for the product until the next trading day.
In determining the matter and the appropriate penalty to be applied, the MDP noted that Rule 5.7.1(b)(i) is aimed at upholding market integrity (i.e. that markets remain fair and efficient). The MDP then stated that "Protecting against market misconduct and promoting the disclosure of important market-related information, is designed to ensure that investors can be confident in making sound investment decisions" [emphasis added].
The MDP went on to say that in the context of domestically licensed financial markets, the concept of market integrity is to be read in light of the objective in paragraph 760A(c) of the Corporations Act – 'to promote fair, orderly and transparent markets'. The MDP interpreted this phrase to mean "a level playing field (free from misconduct and synonymous with investor protection), characterised by sound ethical values and judgement, where regular bids, offers and sales (past and real-time) can be seen and reflect genuine supply and demand (i.e. prices represent all publicly available information)."
According to the MDP, making bids and dealing in a product without the intent to take a genuine or bona fide position in the market creates a false and misleading appearance of supply, demand or liquidity, and ultimately price or market valuation. The MDP commented that, among other things, trading data is used by investors in making decisions by being able to assess supply, demand or liquidity and ultimately price or market valuation. False and misleading trading data distorts the market and has the potential to undermine investor or public confidence that financial markets are level playing fields and that prices reflect all available information.
Ultimately, the MDP held that a breach of Rule 5.7.1(b)(i) is very serious in nature and imposed a penalty of $300,000 against the participant (which has now been paid). Notwithstanding that MDP determinations are made on a case-by-case basis, it is worth noting that comments in the infringement notice regarding market integrity were expressed in the context of market misconduct more generally. In ASIC's view, this recognises the significant obligation imposed on everyone who participates in our financial markets, to ensure that their conduct promotes fair, orderly and transparent markets. Any form of market misconduct undermines market integrity. As such, ASIC anticipates that the MDP's comments on market integrity may be relevant to other matters concerning market misconduct, including matters currently before the MDP.
 Compliance with an infringement notice is not an admission of guilt or liability, and the recipient is not taken to have contravened the Corporations Act.