Report 327 ASIC supervision of markets and participants: July to December 2012 (REP 327) shows ASIC achieved key regulatory and enforcement outcomes during the reporting period, including:

• 27 markets matters were referred for investigation. These matters involved potential insider trading (6), market manipulation (6), possible breaches of the market integrity rules (12) and of the continuous disclosure obligations (3).
• Four individuals were handed sentences for insider trading.
• The Markets Disciplinary Panel (MDP) issued seven infringement notices with penalties of up to $80,000.
• There were also six instances of alleged breaches of the market integrity rules referred to enforcement, principally around late lodgement of annual and monthly capital returns.

As in previous reporting periods, problematic algorithms and the effect of high-frequency trading algorithms continue to be of concern. In particular, wash trades (which occur when one account executes both sides of the trade) are a significant obstacle in maintaining fair and orderly markets. The existence of the high-frequency trading taskforce allowed ASIC to actively and candidly engage with market participants on this topic and, in some cases, get swift corrective action.

ASIC Deputy Chairman Belinda Gibson said: ‘ASIC continues to strengthen investor confidence in the integrity of our markets, as we refine our surveillance of Australia’s financial markets. ASIC has also significantly reduced the time taken to commence investigations into suspicious market conduct.

‘Of the 138 market matters referred to ASIC’s enforcement team for investigations since ASIC assumed responsibility for market supervision in August 2010, 42 were made within 30 days of identifying the possible misconduct, and 93 were made in less than 60 days.’

ASIC’s Senior Executive Leader of Market and Participant Supervision, Greg Yanco, made specific reference to the establishment of taskforces to consider issues relating to dark liquidity and high-frequency trading (HFT). ‘The work undertaken by these taskforces, as we foreshadowed in our last report, buttressed our surveillance and policy work. Five HFT matters were referred to enforcement, and since the end of the reporting period, the dark liquidity taskforce has also referred a matter to enforcement for investigation.

‘As always, ASIC has worked closely with market participants on matters relating to problematic algorithms, in particular wash trades – which occur when one account executes both sides of the trade. Active engagement with market participants has allowed for swift corrective action when things do go wrong.’

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Report 277 ASIC supervision of markets and participants: July to December 2011 (REP 277) identified that during the reporting period:

• There were 20,029 trading alerts with 131 matters requiring further consideration during the reporting period. Alert numbers can depend on trading conditions. We continue our calibration of alert parameters to generate more targeted alerts and eliminate ‘false positives’. This has resulted in a drop of more than 3,000 alerts.
• Some 23 matters were referred for investigation. These matters involved potential insider trading (6), market manipulation (5), possible breaches of the market integrity rules (9) and of the continuous disclosure obligations (3).
• A further four matters referred for investigation were identified during ASIC’s participant surveillance visits. These related to possible breaches of market integrity rules (2), misleading and deceptive conduct (1), and inappropriate advice (1).
• In the reporting period one case of insider trading and one case of market manipulation were successfully prosecuted, a further three people agreed to plead guilty to insider trading and three companies paid penalties after ASIC issued infringement notices under the Market Integrity Rule regime.

ASIC’s Deputy Chairman Belinda Gibson said: ‘ASIC’s comprehensive and tailored surveillance of financial markets continues to build investor confidence in the integrity of our markets. Our approach is to take preemptive action where possible to prevent market misconduct. Our insider trading prosecutions are evidence of our ability to respond where breaches are identified.

‘Since ASIC has taken on responsibility for market supervision, there has been a significant reduction in the time taken to commence investigations into suspicious market conduct. Of the 75 market matters referred for investigations since ASIC assumed responsibility for market supervision in August 2010, 26 of the 75 were made to ASIC within 30 days of identifying the possible misconduct, making a total of 54 out of 75 referrals that were made in less than 60 days,’ said Ms Gibson.

ASIC’s Senior Executive Leader Market and Participant Supervision, Greg Yanco said: ‘During the reporting period, ASIC focused on detecting market integrity rule breaches, including issues relating to trading which has the potential to create false and misleading appearances, and the appropriateness of controls relating to automated order processing.

‘ASIC is continuing to work closely with market participants on matters relating to order management including problematic algorithms and orders for some exchange-traded funds.

‘We are seeing a drop in the number of problematic algorithms which, we believe, is a result of the industry responding to our initiatives. However we will continue to focus on electronic trading and technology due to the potential for market disruption when things go wrong,’ said Mr Yanco.

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