ASIC published August 13 proposed rules and guidance on automated trading and released its fourth report on the supervision of Australian financial markets and market participants.
Consultation Paper 184 Australian market structure: Draft market integrity rules and guidance on automated trading (CP 184), proposes draft rules and guidance on participant level controls for automated trading. ASIC foreshadowed this release when it published Consultation Paper 179 Australian market structure: Draft market integrity rules and guidance (CP 179) in June 2012 (see 12-143MR).
ASIC’s proposed rules and guidance include:
draft new market integrity rules requiring direct control over filters and automated controls to suspend orders and/or systems;
draft rules that revise the process for certifying systems and reviewing changes at least yearly; and
draft regulatory guidance on automated trading, covering issues consulted on in (CP 168), consolidated with updated guidance currently contained in ASX guidance notes. This includes guidance on testing of systems and filters/controls – the ability to manage highly automated trading, and stress testing of order flow.
ASIC Deputy Chairman Belinda Gibson said equity markets in Australia and around the world are now overwhelmingly electronic and automated.
‘Recent events overseas are a reminder of the speed and automation of markets and the importance of robust controls over those systems. The enhancements to participant-level controls that ASIC has released for consultation, together with the market-level controls released in June will build confidence in the integrity and cleanliness of our capital markets and facilitate international capital flows,’ Ms Gibson said.
‘The increasing automation of trading, and ASIC’s focus on it, is also evident in our market supervision report, which identified issues from high frequency trading. This type of trading, and algorithms generally, continue to be of concern. The measures we are proposing will strengthen our protection against the type of disruption we have seen recently in other markets.’
Report 296 ASIC supervision of markets and participants: January to June 2012 (REP 296) is ASIC’s fourth report on the supervision of Australian financial markets and market participants. It identified that during the reporting period:
There were 22,225 trading alerts with 114 matters requiring further consideration during the reporting period. ASIC continues its calibration of alert parameters introduced as a result of market in competition in October 2011.
36 matters were referred for investigation, a significant jump on the previous period (23). These matters involved potential insider trading (13), market manipulation (5), possible breaches of the market integrity rules (15) and of the continuous disclosure obligations (3). Eight of the referrals for possible breaches of the market integrity rules were from ASIC’s Wholesale Markets team, relating to conduct in the ASX 24 market.
Two people agreed to plead guilty to insider trading and we issued four infringement notices for breaches of the continuous disclosure provisions of the Corporations Act.
For the first time, the report includes information on our reviews of securities dealers – Australian financial services (AFS) licence holders who are not market participants, but sell securities products through a market participant. ASIC found some securities dealers that were not taking adequate steps to ensure their advisers were giving appropriate advice to clients. ASIC also found instances of mis-selling of securities and other financial products as a result of misleading advertising. We propose to include this information on securities dealers in future reports, separately from market participants.
Ms Gibson said: ‘ASIC’s tailored financial markets surveillance continues to strengthen investor confidence in the integrity of our markets, and ASIC has significantly reduced the time taken to start investigations into suspicious market conduct.
‘Of the 111 market matters referred to ASIC’s enforcement team for investigations since ASIC assumed responsibility for market supervision in August 2010, 33 of 111 were made within 30 days of identifying the possible misconduct, and 75 of 111 were made in less than 60 days.’
ASIC’s Senior Executive Leader of Market and Participant Supervision Greg Yanco said: ‘During the reporting period, ASIC focused on detecting market integrity rule breaches, including those on the ASX24 market. We also uncovered trading issues which had the potential to create false and misleading appearances.
‘ASIC continues to work closely with market participants on order management including problematic algorithms. It is an area of focus, and we will be engaging with participants actively in coming months, especially given the potential for market disruption when things go wrong.’
ASIC assumed responsibility for market supervision and real-time surveillance of trading from ASX on 1 August 2010. This now includes supervision of Chi-X Australia, which commenced operations on 31 October 2011. ASIC supervises compliance with market integrity rules, compliance with the Corporations Act 2001 and ensures that Australian financial services license conditions are met by market participants.
Submissions to CP 184 close on 14 September 2012.