On 12 August this year, ASIC announced (Media Release 13-213MR) that it had released a number of new and amended Market Integrity Rules (MIR’s) aimed at improving the integrity of dark liquidity crossing systems, along with HFT related enhancements to the MIR for market manipulation.  The new rules will come into force in stages through to May 2014.

Although the bulk of the media release and related rule changes focus on dark liquidity, arguably the change to the manipulation MIR will have a greater impact to compliance teams across a wider community of market participants.

In particular, many ASX 24 market participants are unaware that from 9 February 2014, they will not only be subject to an entirely new manipulation MIR, but the expectations for compliance with this rule will represent a sea change in the way surveillance and compliance is currently done in ASX 24 markets.

ASX/Chi-X market participants

For ASX and Chi-X participants, the additional HFT related circumstances to consider in MIR 5.7.2 are substantial in themselves, given they cover three key metrics that most participants are probably not monitoring, being:

  1. the frequency of order placement per person;
  2. the volume attached to orders per person; and
  3. the order messages to trade ratio per person.

In effect the additions to 5.7.2 will mean increased surveillance and monitoring responsibilities for ASX/Chi-X participants, particularly on an intra-day basis, because the type of HFT related activity it is designed to monitor often cause intra-day events if those HFT algorithms misfire.

Two key examples of published infringement notices to date involving ‘algos gone wild’ are the $52,000 penalty against Credit Suisse in September 2012 (MDP05/12) and the recent $130,000 penalty against ABN Amro on 30 October this year (MDP08/13).

ASX24 market participants

For ASX24 participants, the new MIR 3.1.2 is completely different to the old ‘manipulation’ rule it replaces.  Importantly it can also be interpreted as capturing a broader range of manipulative behaviour, with a lower evidence threshold compared with the old rule.

A good example of this broader scope is the fact that a breach will occur where the participant trades on behalf of another person and, taking into account the circumstances of the order listed in 3.1.2(3), the participant ‘ought reasonably suspect’ the person intended to create a false or misleading appearance of active trading in any Contract or with respect to the market for, or the price of, any Contract. Arguably the old rule was also limited to price manipulation, whereas the new rule additionally covers the creation of misleading appearances of ‘active trading’ and the general ‘market for’ the Contract.

On top of this, in order to prevent, detect, self-report and mitigate breaches of the new rule, ASX24 participants will need to implement a much higher standard of surveillance and monitoring of all orders passing through their Automated Order Processing gateways. This new surveillance must also occur on an intra-day basis and incorporate associated compliance procedures for dealing quickly (i.e. within minutes) with any intra-day events that might indicate manipulative trading.

The ABN Amro infringement notice mentioned above is a good example of an event that could occur in any market where HFT and/or other algorithmic trading is occurring.

With a number of precedents now in play in the equities space, ASIC is unlikely to be receptive to ASX24 participants who have not heeded the warnings and implemented a pro-active approach to surveillance and monitoring ahead of the 9 February 2014 go live date.