Published On: Thu, Dec 13th, 2012

ASIC Statement on October Share Trading Spike

Greg Medcraft ASIC chairman

Greg Medcraft ASIC chairman

ASIC’s priority is to ensure market integrity is maintained and that markets are fair, orderly and transparent. Given the current public interest in market structure issues, ASIC considers it appropriate to provide an update about an early sudden spike in the share price of a number of ASX 200 companies on 18 October 2012.

ASIC has ruled out a dysfunctional algorithm or high frequency trading strategies as the cause of the spike.

On that particular morning ASIC’s market surveillance team received numerous price alerts regarding trading of securities in the A-B rotation of the opening auction on the ASX. The opening auction on this day set the prices for the expiry of the S&P/ASX 200 October 2012 SPI Future (Oct SPI).

ASIC’s enquiries have revealed:

that large volume orders to sell securities in the opening auction had been placed through a single broker
immediately prior to the commencement of the opening auction, there was a reduction in the volumes of those sell orders for securities trading in the A-B rotation of the auction
this late reduction in volumes caused several securities to trade in the auction at significantly higher prices relative to the previous day’s close
these elevated prices for each rotation, especially the A-B group, impacted the settlement price of the Oct SPI and consequently certain S&P/ASX 200 Index (XJO) option contracts, and
that the orders placed through the broker were placed and amended via an order management system used to execute XJO baskets for the purposes of index arbitrage.

ASIC has spoken with the market participant and the ASX, to obtain information regarding the cause of the trading spike. Interviews were conducted the day following the incident with the parties involved in the transactions – including the client.

Enquiries are continuing. ASIC has no further comment at this time.

Background

On 27 November 2012 ASIC released a market supervision update reminding market participants of their execution obligations around futures expiries, as outlined in ASX Guidance Note 32: Bulk Authorisation of Index Arbitrage Orders in ITS (GN32). It provides market participants with guidance in relation to the timing of entry of index arbitrage orders, in particular to orders entered to exit or unwind an index arbitrage hedge position during the pre-open on expiry, and any other time when opening or altering an index arbitrage hedge position with orders to be executed at the open.

GN32 states that orders valued up to $100 million, need to be entered no later than one minute before the relevant group opening, extending up to 10 minutes prior to opening for orders valued up to $900 million. Importantly, if a participant materially amends the volume of an existing order, this will be considered as a ‘new’ order. As a result, it would be subject to the verification, price and time guidelines contained in GN32.

ASIC reminds participants that while filters may be adjusted on expiry dates to handle the volumes associated with the bigger baskets, this should be done in accordance with GN32, and at all times within the principles of a fair, orderly and transparent market

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