ASX Disciplinary Tribunal IMC Pacific
The ASX Disciplinary Tribunal (the ‘Tribunal’) has imposed a total fine of $75,000 (plus GST) on IMC Pacific Pty Ltd (‘IMC’) for contravening ASX Market Rule 14.1.1 with respect to the following Orders it entered into the Trading Platform:
(i) On 8 December 2008, by erroneously entering two buy Orders for 5,000 of the fully paid Exchange Traded Fund Units in SPDR S&P/ASX 200 Listed Property Fund (‘SLF’) at $35.31 (‘the SLF Bids’) into the Trading Platform which resulted in a market for SLF that was not both fair and orderly (‘Contravention 1’).
(ii) On 9 March 2009, by entering seven Bids for the fully paid ordinary shares of QBE Insurance Group Limited (‘QBE’) into the Trading Platform which resulted in a market for QBE that was not both fair and orderly (‘Contravention 2’).
(iii) On 9 March 2009, by entering one Bid for 1050 QBE into the Trading Platform at $0.004 which resulted in a market for QBE which was not both fair and orderly.
IMC contested Contraventions 2 and 3.
For these three contraventions the Tribunal imposed a total fine of $75,000 (plus GST).
The Circumstances of the matter are detailed as follows:
At 10:50.30 on 8 December 2008, IMC entered a buy order via an automated trading strategy into the Trading Platform for 5,000 SLF at $35.31 (the ‘First SLF Bid’). Prior to the First SLF Bid, the last traded price of SLF was $8.40 (the ‘SLF Reference Price’). The First SLF Bid traded immediately and in its entirety with three existing Asks, increasing the price of SLF to $10.00 ($1.60 or 19% above the SLF Reference Price).
At 10:50.30, IMC entered a second buy order into the Trading Platform for 5,000 SLF at $35.31 (the ‘Second SLF Bid’). The Second SLF Bid traded immediately and in its entirety with an Ask entered by another Participant at $10.00 (again, $1.60 or 19% above the Reference Price). The SLF Bids were entered by reason of an error by an IMC trader who set up a trading book designed for trading in SLF but mistakenly selected a basis for pricing SLF which was intended for another security that was trading at a significantly higher price.
The First and Second SLF Bids resulted in four transactions for SLF. Pursuant to a request from IMC and with counterparty consent, three of the four transactions were cancelled by ASX Market Control. Counterparty consent was withheld for the remaining transaction. IMC honoured the transaction that was not cancelled.
Contraventions 2 and 3 on 9 March 2009
At 14:26:36.91 on 9 March 2009, another Market Participant (CMC Markets Stockbroking Pty Ltd, see Disciplinary Announcement 372/09) erroneously entered an Ask for 20,000,000 QBE at $10.000 (the ‘Erroneous Ask’).
The last Market Transaction for QBE, prior to the entry of the Erroneous Ask, was executed at 14:26:31.65 at a price of $15.700.
The Erroneous Ask traded immediately with every Bid in the QBE Bid Schedule, resulting in approximately 258 transactions at prices from $15.690 to $11.000, leaving 19,485,672 remaining of the Erroneous Ask to be filled and resulting in a 29.9% decrease in the price of QBE from $15.700 to $11.000.
Following these transactions, no Bids remained in the market for QBE. The ‘Bid/Ask/Last Traded’ values were ‘No Bid/$10.000/$11.000’.
The Erroneous Ask was the priority Ask in the market for QBE. Under the ASX Matching Rules, any Bid priced at or above the priority Ask for a product will match at the price of the priority Ask until the priority Ask is filled.
The transactions resulting from the Erroneous Ask affected the price of related derivatives markets. IMC entered into a series of derivatives transactions in the markets for QBE contracts for difference (‘CFDs’) and options, in which IMC is a registered market maker.
At 14:26:37.03, IMC entered a Bid, using its automated hedging strategy, for 5,363 QBE at $10.020 (‘QBE Bid 1’) for the purpose of hedging a related derivatives transaction. This was the first Bid in the market for QBE following the Erroneous Ask.
At 14:26:37.04, QBE Bid 1 traded in its entirety with the Erroneous Ask for 5,363 QBE at $10.000, in accordance with the ASX matching rules, resulting in a 9.1% decrease in the price of QBE from $11.000 to $10.000. Immediately following the entry of QBE Bid 1, IMC entered a further four Bids for QBE at a price of $10.020 (‘QBE Bids 2 to 5’). Each of these Bids was placed, using IMC’s automated hedging strategy, to hedge related derivatives transactions. Each of these Bids matched with the Erroneous Ask at $10.000.
At 14:26:37.05, another Participant entered a Bid for 4,500 QBE at $15.650. At 14:26:37.06, this Bid matched with theErroneous Ask and resulted in a transaction for 4,500 QBE at $10.000.
At 14:26:37.21, IMC entered QBE Bid 6 for 1,050 QBE at $10.000, using IMC’s automated hedging strategy, for the purpose of hedging a derivatives transaction. This Bid matched with the Erroneous Ask and resulted in a transaction for 1,050 QBE at $10.000.
At 14:26:37.30, IMC entered QBE Bid 7 for 3,000 QBE at $10.040, using IMC’s automated hedging strategy, for the purpose of hedging a derivatives transaction. This Bid matched with the Erroneous Ask and resulted in a transaction for 3,000 QBE at$10.000.
QBE Bids 1 to 7 were the subject of Contravention 2.
At 14:26:38.21, IMC entered a bid for 1,050 QBE at $0.004 (‘QBE Bid 8’), using IMC’s automated hedging strategy, for the purpose of hedging a derivatives transaction. Immediately prior to the entry of QBE Bid 8, the ‘Bid/Ask/Last Traded’ values were ‘No Bid/$10.000/$10.000’.
At 14:26:38.66, another Market Participant entered an Ask for 500 QBE at $0.004. At 14:26:38.67, this Ask matched with QBE Bid 8, resulting in a transaction for 500 QBE at $0.004 and therefore a 99.96% decrease in the price of QBE from $10.000 to $0.004.
QBE Bid 8 was the subject of Contravention 3.
At approximately 14:27:17, the residual Erroneous Ask of 18,768,343 QBE was cancelled by the Market Participant who entered it in the Market Platform.
At 14:27:19.71, QBE traded at $10.060. This was the first trade above $10.000 concluded as a result of a new Bid following the entry and cancellation of the Erroneous Ask.
At 14:27:25.53 QBE traded at $15.30.
The Erroneous Ask was referred to ASX under Market Rule 15.2.6 and was subsequently recognised by ASX as a Trading Error. Later on 9 March, ASX Market Control issued a circular directing all Market Participants who were party to a transaction in QBE at approximately 14:26 at $15.000 and below to cancel those transactions. 158 transactions totalling 963,428 QBE were cancelled. Between the time of the entry and the time of the cancellation of the Erroneous Ask, a total of 63 transactions occurred in the market for QBE at or below $10.000, including the eight transactions resulting from QBE Bids 1 to 8.
IMC complied with the Market Control circular and cancelled each transaction resulting from QBE Bids 1 to 8.
In determining penalty, the Tribunal considered a number of factors, including the following:
(a) The disciplinary history of IMC, having had two unrelated disciplinary sanctions recorded against it by a Disciplinary Tribunal.
(b) IMC fully co-operated with ASX in relation to the conduct of its investigation into the matter.
(c) IMC did not contest Contravention 1. IMC contested Contraventions 2 and 3, and Contravention 2 was also the subject of proceedings before the ASX Appeal Tribunal. The Appeal Tribunal dismissed IMC’s appeal.
(d) The misconduct the subject of Contravention 1 was unintentional. The misconduct the subject of Contraventions 2 and 3 resulted from IMC’s automated hedging of derivatives transactions entered into (as part of IMC’s market making activities) after the Erroneous Ask had been entered into the market by another Participant. The QBE Bids were not directed to exploiting the market’s disorder following the Erroneous Ask.
(e) IMC self-reported the misconduct the subject of Contravention 1 in a timely manner.
(f) No financial benefit accrued to IMC. IMC lost money overall as, notwithstanding the cancellation of the equity market transactions, the derivative transactions were honoured.
(g) The timely steps IMC has taken to prevent a recurrence of the contravention.
(h) The alleged misconduct had the potential to damage the reputation and integrity of the ASX and the market and facilities it operates.
IMC contested Contraventions 2 and 3. IMC argued that, on its proper construction, Market Rule 14.1.1 presupposes a market that is “fair and orderly” prior to the conduct that is alleged to result in a market that is not both “fair and orderly”. IMC further argued that Rule 14.1.1 imports notions of reasonableness against which a Participant’s conduct must be assessed. On this basis, IMC argued its QBE Bids did not result in a market that was not orderly because the Erroneous Ask was the real and effective cause of the disorder. IMC argued that the Erroneous Ask, in light of the operation of the ASX Matching Rules, prevented the market for QBE both from pricing that security above $10.000 and from maintaining an orderly Bid schedule until that Ask was cancelled approximately 40 seconds after its entry. Further, since the QBE Bids were entered via an automated hedging strategy for the purpose of hedging derivatives exposure incurred in IMC’s market making activities in response to the impact of the Erroneous Ask on derivatives markets, the Bids would not have been entered into the market if it were not for the Erroneous Ask.
The Tribunal determined at first instance that there is no implication of reasonableness or intention in the Rule. The plain meaning of the Rule is that there is a prohibition on doing something that results in a market that is not both fair and orderly regardless of whether there is a good reason for doing that thing. Similarly, there is no distinction in the Rule between human error and automated responses. It is the conduct of the Participant that is the focus of the Rule, not the cause or means of that conduct. On a proper construction of the Rule, the reasons for which IMC placed the QBE Bids are irrelevant to whether or not there was a contravention of Market Rule 14.1.1.
In considering the facts of contraventions 2 and 3, the Tribunal was assisted by having regard to the facts in a previous, uncontested determination: Aequs Securities Pty Limited, ASX Circular dated 30 October 2009 (No. 366/09). On this basis, the Tribunal concluded that QBE Bids 1 to 8 contravened Market Rule 14.1.1 as, even though there was, at the time of those bids, a market for QBE that was not orderly, the bids continued or perpetuated that fact.
IMC appealed from the finding of the Tribunal concerning Contravention 2 on the basis that the Tribunal erred in drawing an analogy with the Aequs matter. IMC further argued that the Tribunal erred in purporting to apply Market Rule 14.1.1 in the circumstances of a market that was already disorderly and incapable of orderly trade.
The Appeal Tribunal dismissed the appeal, finding no error in the Tribunal’s approach. The Appeal Tribunal found that where a Market Participant has perpetuated or continued the existence of a disorderly market such a Market Participant is still capable of breaching this Rule.
Annexure A – Disciplinary Tribunal Sanction Guidelines
As the contravening conduct occurred after 31 March 2008, the Tribunal has had regard to the Disciplinary Tribunal Sanction Guidelines which are Annexure A to the Disciplinary Appeals and Processes Rulebook. The Tribunal has determined that these Contraventions are Level 2 Serious Contraventions, for which the applicable penalty range is $20,000 – $100,000 (plus GST). Given the aggravating and mitigating circumstances in this matter the Tribunal determined that the following fines represent an appropriate sanction:
Contravention 1: $25,000
Contraventions 2 and 3: $50,000
The Tribunal’s opinion is that this sanction will serve as a deterrent to this Participant and other Participants from engaging in similar misconduct while at the same time appropriately serve the interests of ASX and Market Participants by supporting the integrity of the market it operates.