The Securities and Futures Commission (SFC) has reprimanded IMC Asia Pacific Limited (IMC) and fined it $1.5 million for regulatory breaches and internal control failings (Note 1).
The disciplinary action follows an SFC investigation into IMC’s use of short selling indicators for sales orders conducted for its options and proprietary trading.
The SFC found that, from May 2007 to July 2010, IMC:
inputted the wrong short selling indicator to 298,228 sale orders out of a total of 1,088,692 sales orders which comprised about 34% of sale orders executed by IMC for its options trading and almost 10% of sale orders executed for its proprietary trading (Notes 2, 3, 4);
failed to report short selling input errors to Hong Kong Exchange and Clearing Limited (HKEx) until June 2010 (Notes 2, 3, 6); and
failed to implement adequate internal control procedures to detect and prevent the misuse of short selling indicators by traders (Note 7).
In June and July 2010, IMC executed 55 short selling orders (totalling 100,000 shares valued at HK$4,324,680) below the prevailing best ask price when it was not a market maker for the corresponding stock option (Notes 2, 3, 5).
In deciding the penalty, the SFC has taken into account that the poor controls of IMC existed for over three years; IMC has no previous disciplinary record; the breaches involved no naked short sales; and IMC has strengthened its internal controls since then.
“IMC’s failures spanned a period of over three years during a time of substantial market volatility when short selling controls were high on the regulatory agenda. IMC’s negligent controls were well below the standards expected in Hong Kong. Market participants should be aware that short selling is tightly regulated in Hong Kong and any breaches of the rules will be strictly enforced,” the SFC’s Executive Director of Enforcement, Mr Mark Steward said.