In financial markets, trade surveillance is the process of monitoring trading activity for suspicious activity. It’s a crucial tool in protecting all market participants, but it can also complicate regulatory compliance. For this reason and more, financial institutions must understand the requirements of trade surveillance and enforcement trends to avoid potential violations.
Here’s everything you need to know about navigating trade surveillance.
Understanding ASIC Trade Surveillance
In trade surveillance, regulators, Market Participants (i.e. members of an exchange) and other licence holders monitor trade data including trading patterns to identify various types of market misconduct — for example, insider trading or market manipulation. The main goal is to uphold market integrity and protect participants, including investors and consumers.
In Australia, the main authority responsible for oversight of markets and related trading activity is the Australian Securities and Investments Commission (ASIC). It uses a sophisticated trade surveillance system to automatically detect potential market misconduct and suspicious trading patterns. The system can also identify where participants may be getting inside information.
To do this, ASIC’s system analyses trading activity and other data from multiple sources, including its own databases, the Australian Securities Exchange (ASX), other securities exchanges and the Australian Taxation Office (ATO). ASIC searches through information such as:
- Order data.
- Origin of order data.
- Trade executions.tivi
- End-of-day summaries.
- Over-the-counter (OTC) market transactions and reference data.
As the ASIC surveillance teams and systems parse through the data, they look for patterns that could indicate suspicious trading activity. This may include predefined risk indicators or “red flags” including behaviours such as:
- Large order executions and/or deletions.
- High order-to-trade ratios.
- Stock pumps or dumps.
- Predatory high-frequency strategies.
- Layering and spoofing.
- Unusual quote/order price movements.
If ASIC suspects market misconduct, it will reach out to the market participant in the first instance to make enquiries into the behaviour. It also requires Market Participants to have appropriate surveillance arrangements of their own, which may lead to suspicious activity reports (SARs) — required to be submitted to ASIC by Market Participants under the Market Integrity Rules (MIRs ) — as a trigger to conduct further investigations or thematic reviews. It also monitors for overall compliance with its MIRs.
According to ASIC, this process of surveillance combined with SARs allows it to “identify harms more quickly and more accurately.” That aligns with the ASIC’s priorities for market intermediary supervision, seeking to establish fair and orderly markets, improve product design and distribution, ensure resilience and more.
What Financial Organisations Should Know About Trade Surveillance
As an Australian financial services licensee, your compliant conduct is crucial in protecting market integrity and the financial well-being of other stakeholders. Here’s what that means for you in the context of trade surveillance:
Your Responsibilities
You must ensure that every trading strategy or other activity aligns with the relevant general obligations under your licence, and that you understand and are complying with the relevant MIRs. If you execute trades on behalf of clients, you must be aware of the MIRs whether or not you are a Market Participant. These rules differ depending on the type of market, so it’s important to understand each regulatory requirement that applies to your firm.
Depending on the nature, scale and complexity of your business, the types of monitoring and surveillance expected may include:
- Monitoring automated order processing limits and order rejections on a pre-trade basis.
- Monitoring for irregularities in employee trading.
- Clearly defining limitations on employee use and sharing of inside information.
- A real-time surveillance software that can alert for suspicious trading (for organisations executing trading volumes that are too large to monitor manually).
- Escalating suspicious activity internally and potentially making a SAR to ASIC.
- Submitting a reportable situation report to ASIC if the conduct involves a breach by your firm.
Potential Risks
If you don’t perform adequate due diligence and trade surveillance, your firm could face hefty ASIC penalties, as in these cases against Market Participants in the futures markets:
Case Study 1: J.P. Morgan Securities Australia
In May 2024, an ASIC investigation and the Markets Disciplinary Panel (MDP) found that J.P. Morgan Securities Australia allowed a client to place 36 suspicious orders on the futures market and should have identified the intention to create false or misleading price appearances. Some of the signs of fraudulent market activity included a large number of trades seconds before market close and a significant proportion of small-volume orders.
Ultimately, the firm paid a $775,000 fine. This MDP decision emphasises that automated trade surveillance systems aren’t enough; firms also have a responsibility to act proactively on insights, respond to ASIC alerts and take responsibility for suspicious client activity.
Case Study 2: Macquarie Bank
In September 2024, the MDP imposed its highest-ever penalty: a $4.995 million fine for allowing three clients to place suspicious orders on the futures market. The institution, Macquarie Bank, reportedly breached the Market Integrity Rules, failing to take timely action despite numerous ASIC forewarnings of suspicious activity.
The MDP found that Macquarie Bank didn’t act on “obvious risks of deficiencies in its surveillance system.” At the time, the bank — which is the largest Market Participant in its sector — also hadn’t taken responsibility for this conduct.
For these reasons and more, the MDP imposed a record penalty to reflect “serious, prolonged and potential systemic failures.”
Case Study 3: COFCO International Australia Pty Ltd and COFCO Resources SA
Even if you are not a market participant, you could face civil or criminal action from ASIC for certain behaviours.
For example, in July 2024, ASIC launched civil penalty proceedings alleging that two companies manipulated the ASX24 market. This included 34 occasions of contract manipulation — specifically “marking the close,” or placing orders shortly before the end of the trading day to affect the daily settlement price.
According to ASIC, the effects included:
- Causing contract prices to incorrectly reflect supply and demand.
- Creating artificial prices on the ASX24.
ASIC said the companies “engaged in a repeated pattern of manipulation to benefit themselves to the detriment of other participants in the market.” The organisation is seeking declarations and pecuniary penalties against both defendants.
Future Trends in Trade Surveillance
- New technology: From AI and cloud tools to complex behavioural analytics, emerging tech presents opportunities for streamlined processes. More than ever, there are different trade surveillance solutions and tools to help firms of every size and complexity. It’s especially important to keep up with this trend to maintain a competitive advantage and address increasingly difficult challenges in regulatory compliance, trade surveillance and more. For example, according to ASIC, around 60% of licensees intend to ramp up AI usage; ASIC also recommends adequate governance to manage these solutions before deployment.
- Changing priorities: ASIC’s 2025 strategic priorities will shape its management of trade surveillance, breach reports and more, which is relevant because this could directly impact your current activity and future plans. In particular, ASIC’s focus on the following should influence your trade surveillance strategy:
- Strengthening investigation and prosecution of insider trading.
- Misconduct damaging market integrity.
- Systemic compliance failures by large financial institutions.
- New or emerging conduct risks within the financial system.
- Complicated environments: As financial regulations, economies and pressures shift, trade surveillance activity and compliance will remain in flux. The importance of keeping up with regulatory change in this environment will continue to be of primary importance when firms are seeking to reduce regulatory risk through the appropriate use of trade surveillance.
Get Trade Surveillance Support
Although integrating trade surveillance considerations into already intricate regulatory strategies can be difficult, it’s crucial for protecting your firm, your clients and the integrity of the wider financial market. Fortunately, compliance services and regulatory change tools can help.
At MIntegrity, we tailor our services depending on your needs.
For Market Participants of an exchange, we provide:
- Pre-trade services: We act as an “appropriately qualified person” to help with Automated Order Processing certifications required under the securities MIRs. We can also help implement or calibrate pre-trade filters based on the nature, scale and complexity of your business.
- Post-trade services: We provide independent help to implement trade surveillance software, including selecting and calibrating post-trade alerts, reviewing alert policies and procedures, training analysts and more. We also offer ongoing reviews and advice.
For Australian Financial Services Licence (AFSL) holders considered securities dealers, we provide the same services. However, for AFS licensees, trade surveillance requirements are part of the general licence obligations instead of the Market Integrity Rules. Therefore, we shift our approach to ensure you cover all surveillance risks appropriately.
Need help simplifying your trade surveillance compliance approach? Contact us today to see how our customised services can fit your firm.
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