Report 623 Review of Australian equity market cleanliness: 1 November 2015 to 31 October 2018 examines market cleanliness for the period, with a focus on insider trading and information leaks ahead of material market announcements. It extends our work in Report 487 Review of Australian equity market cleanliness, which found an overall improvement in market cleanliness over the 10 years to 31 October 2015.

In a clean market, prices react immediately after new information is released through the proper channels. Abnormal price movements and unusual trading patterns ahead of material announcements may indicate an ‘unclean market’.

The overall cleanliness of the market fluctuated between 2015 and 2018—despite a deterioration in 2016, market cleanliness improved in 2017 and 2018 to settle around 2015 levels. During the period we found that:

• on average, 0.6% of accounts that traded before material price-sensitive announcements were deemed suspicious
• suspicious accounts profitably traded on average 5.1% of the volume before each announcement
• while the percentage of suspicious trading accounts remained stable, the volume traded by these accounts increased
• there was more suspicious trading before merger and acquisition announcements than other announcements
• there was more suspicious trading and abnormal price movements before unscheduled announcements than scheduled announcements
• announcements by smaller companies were more likely to be unclean. Many of these smaller companies were in the materials sector.

ASIC Commissioner Cathie Armour said ‘Markets cannot operate with a high degree of integrity if people trade with inside information. We expect all parties involved in mergers and acquisitions to put in place meaningful confidentiality controls at the start of a transaction – and make sure the controls are rigorously followed. Controls for some small cap companies are clearly lacking and need to be tightened.’

Our findings complement independent research released in 2018 by Intralinks and Cass Business School. The study found Australia was the cleanest market over the last decade among a sample of major markets.

Going forward, ASIC will use historical trading behaviour before material announcements to enhance our market supervision work and inform our regulatory priorities. We will also increase monitoring of:

• trading ahead of mergers and acquisitions
• brokers with high levels of unusual order flow
• clients that repeatedly exhibit unusual trading behaviour.

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