By Michelle Huckel, Policy Manager, SIAA
There are many matters that stand out in the recent infringement notice issued by the Markets Disciplinary Panel decision against Ascot Securities Pty Limited that set it apart from most recent panel decisions.
In its infringement notice, the Market Disciplinary panel stated that it had reasonable grounds to believe that Ascot contravened:
- Rule 2.1.3 of the Market Integrity Rules by not having in place adequate supervisory policies and procedures.
- Rule 5.5.2 of the Market Integrity Rules by not having and maintaining the necessary organisational and technical resources.
- Rule 5.11.1 (1) (b) of the Market Integrity Rules by not reporting certain orders to ASIC as suspicious in circumstances where it was required to do so in relation to 115 orders.
- Rule 5.7.1 (b) (iii) of the Market Integrity Rules by entering orders into the market in circumstances where it ought reasonably to have held suspicions in relation to 268 orders.
The panel considered that Ascot’s failures in relation to dealing with and failing to report the suspicious orders were related to its failures to have in place adequate supervisory policies and procedures and the necessary organisational and technical resources.
The panel’s findings
While ASIC published the notice on 20 June 2024, the infringement notice was issued over six months ago on 24 November 2023. This is because, unlike other Market Participants that have recently appeared before the panel, Ascot chose not to pay the penalty of over $3.1 million, deciding instead to hand back its markets licence and cease operations. To date no civil or criminal proceedings have been brought against Ascot for the conduct specified in the infringement notice and Ascot is not taken to have contravened the Market Integrity Rules.
The panel found that the alleged contraventions took place from when Ascot first became a Market Participant on 19 November 2014 – which raises the question what ASIC has been doing for the last 10 years in relation to the surveillance of this firm.
The client, whose trades were the subject of the decision, stood out like a sore thumb. The panel found that the client’s volume and style of trading was materially different from Ascot’s other clients, with the total number of orders submitted by Ascot to ASX on behalf of the client representing a very significant proportion of the total number of orders submitted by Ascot to ASX for the period that the client remained a client.
There was no statement of agreed facts. Ascot contested the matter until it made some admissions at the end of day two of its hearing.
Ascot’s pre-trade filters in IRESS were configured to zero and it relied on three DTRs manually authorising all orders to be transmitted to the market. Ascot did not conduct routine post-trade analysis of orders approved by the DTRs and subsequently placed in the market. It did not have a dedicated compliance team, relying instead on a compliance team from its parent firm that was stretched across different business units in the group. And this compliance team did not have access to IRESS to assist it in identifying and detecting patterns of manipulative trading.
Interestingly, the DTRs raised numerous concerns about the client’s trading, both internally and with the client directly. However, despite these concerns no orders or trades were reported to ASIC as being suspicious and the client remained with Ascot until December 2020.
The panel’s decision went into quite a lot of detail about the individual orders that formed the basis of the alleged failure to report under rule 5.11.1. (1) (b) and the alleged placing of suspicious orders under rule 5.7.1 (b) (iii), with both ASIC and Ascot providing expert witness reports. The orders involved:
- layering: the entry of multiple orders on the same side of the order book, with no genuine intention that those orders be executed in order to give the appearance of inflated demand or supply in order to influence the price
- marking the close: the entry of an order or orders late in the trading day or in the Closing Single Price Auction period in circumstances that indicate the client is seeking to unduly influence the indicative or closing price, particularly when entered for a relatively small number of shares, and
- trade through (referred to by ASIC as price restoration transaction): a transaction which trades through the spread which, if for size would not be suspicious, but when initiated for a small number of shares relative to the volume available in the market and the client’s purported demand would appear illogical and possibly uneconomical.
The panel noted that all three categories of trading could give rise to a relevant suspicion for the purposes of both the failure to report and the placing of suspicious orders.
The panel found it had reasonable grounds to believe that Ascot entered suspicious orders into the market that had the following characteristics.
- The purchase of small volumes by trading through the prevailing best bid-ask in the market triggering a price increase, but for a relatively small volume of shares purchased.
- The placement of a disproportionate number of bids for significant volume relative to the rest of the market which incongruously:
– would be cancelled as those bids approached or reached the top of the bid, gaining priority,
– would be amended by volume, thereby losing priority at the same price, and
– sometimes when a bid was hit and partially filled, the balance of the bid would be cancelled shortly thereafter. - The placement of a disproportionate number of resting bids in the relevant security as compared to the sell side of the order book.
- The placement of significant bids for large volumes very early in the day and well before market open.
- During the closing auction the placement of small volume bids in order to influence the indicative closing price.
The order details set out in the infringement notice would provide helpful material for Market Participants to use in staff training, particularly for DTRs.
Important issues for Market Participants to consider
The infringement notice contains important issues to consider for other Market Participants.
The importance of DTRs
It is important for Market Participants to have an appropriate number of DTRs to undertake roles allocated to them, particularly if they are required to review trades before they are entered into the market. More importantly, DTRs must have a way to escalate concerns that they have with orders to compliance to ensure that the participant complies with its obligations to make suspicious activity reports and prevent suspicious orders being entered into the market.
Policies and procedures
Market Participants need to ensure that their compliance manual is regularly and appropriately maintained, reviewed and updated and ensures compliance with the relevant rules, in particular suspicious activity reporting and suspicious orders.
Not only that – participants must ensure they can prove their staff (particularly their DTRs) have read the manual or been trained in relation to its requirements. Staff must also know how to access the manual.*
It is important that firms don’t accept a template or pro-forma compliance manual without tailoring it for their operations to make sure that it reflects their business and procedures. In the Ascot decision, the panel found the manual had not been updated during the whole of the period from 17 September 2014 until 1 April 2021 and contained references to activities that Ascot was not licensed to undertake.
Take ASIC’s call seriously
Market Participants must take it seriously if ASIC contacts them with concerns about a client’s trading.
Organisational and technical resources
The panel noted that a Market Participant should have most, if not all of the following organisational and technical resources to ensure that it complies with its obligations as a gatekeeper to prevent manipulative trades from being placed in the market:
- Appropriate pre-trade filters and post trade monitoring in relation to every order it receives.
- Additional controls relating to how employees or authorised representatives engage with a client, including general communication to clients about trade limits and parameters.
- Adequate arrangements in place to manage conflicts of interest, ensuring in particular that the remuneration of staff does not interfere with their obligations.
- Documented reviews conducted by management and the compliance team on a regular basis (ie daily, weekly, monthly, half-yearly and yearly reviews) to ensure the business is complying with the law and the terms of its licence.
- Adequate resources (including financial, technological and human resources) to provide the relevant financial services and carry out the supervisory arrangements to ensure all employees and authorised representatives comply with the law, including sufficient compliance personnel and appropriately empowered responsible managers.
- Effective procedures for how matters are escalated and managed within the business, including but not limited to, issue logs, breach registers and the appropriate training and education of staff.
- Employing appropriately qualified individuals capable of fulfilling their duties.
The question of penalty
The issues the panel considered when determining penalty are of significant interest. It is true to say that Ascot was ‘lucky’ not to have incurred a much higher fine and it is a warning to other Market Participants that much higher penalties are not an aberration but are here to stay.
The following matters are of particular interest and significantly reduced the penalty amount:
- Penalties for alleged contravention of Market Integrity Rules 2.1.3 (supervisory policies and procedures) and 5.5.2 (organisational and technical resources) were assessed under the old penalty regime because these alleged contraventions occurred over an extended period of time across the operation of the old and new penalty frameworks.
- Alleged failures to make suspicious activity reports to ASIC that occurred before 13 March 2019 (the date the new penalty regime came into effect) were assessed under the old penalty regime.
- Alleged failures concerning suspicious orders were treated as a single course of conduct rather than individual contraventions.
- The panel also ordered Ascot to enter into an enforceable undertaking. The panel took the costs that Ascot would incur in the undertaking into account when determining the final penalty amount.
However, there were certain aggravating factors that the panel identified in determining the penalty:
- The conduct in relation to alleged failures to make suspicious activity reports and to enter suspicious orders into the market was very serious and resulted from Ascot’s broader failure to have appropriate supervisory policies and procedures and organisational and technical resources.
- The important obligations Ascot had as a gatekeeper to prevent orders from entering the market where it ought to reasonably suspect that they had been placed with the intention of creating a false or misleading appearance.
- Ascot entered the orders in circumstances where the DTRs had previously communicated their suspicions and concerns about the client’s trading over a number of years not only between themselves but with the client.
- The responsibility for assessing the orders fell entirely to the individual DTRs as a consequence of Ascot’s broader failures.
- A Market Participant that does not have and maintain appropriate supervisory policies and procedures and organisational and technical resources poses a risk to the integrity of the market.
- Ascot benefited from the conduct by achieving cost savings associated with failure to update its policies and procedures, under-resourcing its compliance function, not providing the compliance team with an IRESS licence to monitor clients’ trades and failing to have an appropriate post-trade monitoring system or hiring any individual to conduct post-trade surveillance.
- Ascot had a very poor compliance culture and its internal controls were inadequate. While it was first put on notice that ASIC was making enquiries on 28 May 2020 it did not appear to start an investigation into the matter until 11 April 2022.
The panel identified the following remedial measures that while welcome, did not operate as a mitigating factor in determining penalty because it took too long for Ascot to implement them:
- Employing a number of individuals within the compliance team.
- Implementing refined IRESS pre-trade filters.
- Greater training and education of staff together with attestations and testing of knowledge.
- Adoption of a formal body of review of trades and regular reports to senior management.
Interestingly, the panel considered that the engagement and use of a SMARTS post-trade analysis was a mitigating factor as Ascot was a relatively small Market Participant which generally do not use such a technology resource for reasons of cost.
Penalty breakdown
It is always interesting to see how the panel breaks down the penalties for the various alleged contraventions. The notice highlights the startling difference between penalties under the old regime and the new.
The panel determined the penalty amounts as follows:
Market Integrity Rule | Unadjusted penalty | Final penalty |
2.1.3 – Supervisory procedures | $525,200
(Determined under the old penalty regime as above the middle of the high range). |
$525,200 |
5.5.2 – Organisational and technical procedures | $525,200
(Determined under the old penalty regime as above the middle of the high range). |
$525,200 |
5.11.1.(1) (b) – failure to notify ASIC of suspicious orders (9 courses of conduct) | $2,302,500
7 (pre-13 March 2019 courses of conduct) x $7,500 = $52,500 (determined under the old penalty regime as middle range).
2 (post 13 March 2019 courses of conduct) x $1,125,000 = $2,250,000 (assessed in the middle range). |
$997,500
For the first contravention for each of the first 7 courses of conduct (which each occurred before 13 March 2019) – $7,500 per contravention.
For the first contravention for each of the 2 courses of conduct that occurred after 13 March 2019 – 2,250 penalty units at $210 per unit, being $472,500 per contravention. For each other contravention – nil. |
5.7.1 (b) (iii) – placing suspicious orders
(268 contraventions over 69 trading days, but considered as one course of conduct) |
$2,099,790
9,999 penalty units at $210 per unit (very top of the medium range). |
$1,052,100
5,010 penalty units allocated as follows:
|
Total | $5,452,690 | $3,100,000 |
Next steps
In future, as the panel is more likely to be dealing with conduct taking place post March 2019, fines issued by the panel for similar conduct will be significantly higher than those imposed in the Ascot matter.
Market Participants will be carefully reviewing their policies and procedures regarding suspicious activity reporting and ensuring their DTRs are well aware of the rules concerning the placing of suspicious orders.
And the notice highlights the continuing importance of supervisory procedures and having the necessary organisational and technical resources.
* SIAA offers DTR training and also DTR refresher courses for current DTRs. The refresher courses highlight key changes to:
- ASIC Market Integrity Rules (Securities Markets) 2017
- ASX Operating Rules and Procedures, and
- Cboe Operating Rules and Procedures.