On 20 September 2023, the Australian Securities and Investments Commission (ASIC) issued Infringement Notice MDP05/23 to a particular market participant for alleged contraventions under Part 7.2A.04 of the Corporations Regulations 2001. The notice addressed concerns about a client’s trading behaviour. Activity considered suspicious occurred during the Closing Single Price Auction (CSPA) between March and November 2021 and triggered multiple alerts.

Read on to find out how this notice led to a penalty of more than $800,000 and how your firm can avoid similar non-compliance issues.

Background, alleged contraventions and ASIC responses

The subject of the infringement notice, a market participant of the ASX Market and Cboe Australia Limited and a clearing participant of ASX Clear and ASX Clear (Futures), had a client that was an active trader in particular shares. The market participant knew this client was an experienced trader and had been employed by the industry.

In 2021, the client placed orders in the CSPA that resulted in higher prices than the last traded price; many were also at or above the previously set high. This behaviour triggered “marking the close” (MTC) alerts in the market participant’s post-trade surveillance system. When ASIC contacted the market participant about these alerts, the participant said it reviewed the alerts, found the issue to be “benign” and indicated that no further action was required. ASIC requested more information and the market participant attempted to contact the client multiple times without success. The client was allowed to continue trading without immediate action and only responded after their account was placed into “Liquidation Only Status.”

This conduct and a variety of variables gave the Market Disciplinary Panel (MDP) reasonable grounds to believe the participant had contravened Rule 5.7.1(b) and Rule 5.5.2 of the ASIC Market Integrity Rules 2017, therefore also contravening subsection 798H(1) of the Corporations Act 2001. These breaches are related to suspicions of creating a false or misleading appearance of active trading and the failure to maintain necessary technical resources for surveillance.

Here’s a closer look at each alleged contravention:

 

First Alleged Contravention – Rule 5.7.1(b)

According to the MDP, the market participant should have suspected inappropriate behaviour on the day the client placed the first suspicious order. This is based on a variety of warning factors visible to the market participant. Continued suspicious activity repeated many of these factors and should have been acted upon.

 

Second Alleged Contravention – Rule 5.5.2

The client’s behaviour triggered 44 alerts in the participant’s surveillance system. Therefore, the MDP considered the system itself adequate, but the participant’s response inadequate. Alerts were closed noting “no further action” required, but explanations appeared to be copied and pasted, indicating that the reviews had not taken appropriate account of relevant factors. The MDP considered this a sign of poor staffing, skills and supervision. Furthermore, the market participant didn’t stop the client from trading. Although one of these issues alone may not have represented a contravention, the MDP believed all factors together indicated systemic failures and therefore noncompliance.

 

ASIC and MDP outcomes

The MDP used four key factors from the ASIC Regulatory Guide 216: Markets Disciplinary Panel (RG 216) to determine penalties. These factors were:

  • The character of the conduct.
  • The consequences of the conduct.
  • The participant’s compliance culture.
  • Remedial steps taken by the participant.

Given the background of the behaviour and several compounding factors, the MDP determined a penalty of $832,500. This is a total of 3,750 penalty units across two alleged contraventions.

 

Key compliance takeaways

What should other market participants learn from this notice? How can you avoid these non-compliance issues and the associated penalties? Here are three key tips:

  • Prompt response to alerts: Market participants should promptly investigate and respond to suspicious trading alerts, especially when they indicate potential market manipulation or misleading trading patterns.
  • Enhanced surveillance procedures: Firms need robust surveillance systems and procedures to efficiently identify, review and escalate suspicious trading behaviours, ensuring that automated alerts are thoroughly analysed and acted upon.
  • Effective engagement with regulators: Timely and proactive communication with regulatory bodies, such as ASIC, is crucial. Upon receiving alerts or inquiries, firms should promptly engage and take necessary actions to address concerns.

 

Consequences of failing to act

The failure of other market participants to heed the lessons from this notice might result in two things:

  • Regulatory scrutiny: Similar inaction or delayed response by other market participants could lead to increased regulatory scrutiny and potential penalties for non-compliance.
  • Market integrity risks: Ignoring suspicious trading behaviours may pose risks to market integrity, potentially undermining trust and fairness in financial markets.

That means your compliance decisions don’t just affect your firm; they can have significant impacts on the entire industry and wider financial market.

 

Next steps for firms

Infringement Notice MDP05/23 highlights the significance of prompt and thorough responses to suspicious trading alerts. Market participants must prioritise robust surveillance, timely engagement with regulators and swift action to uphold market integrity and regulatory compliance.

Want to learn more about avoiding non-compliance issues like these? Contact us today for all the help you need.

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