ASIC supervision report: FX no longer the target of scrutiny

The Australian Securities and Investments Commission (ASIC) today published its ninth report on the supervision and surveillance of Australian financial markets and market participants, relating to the period between July and December 2014.

Over the last year, ASIC has demonstrated considerable concern over conduct in the retail FX market, and the exposure to risk that retail customers had been experiencing, therefore had placed a prioritized surveillance operation on the FX industry in Australia.

This had extended as far as banning retail FX firms, releasing public warnings which generally highlighted the potential pitfalls of trading retail FX and, as reported following an investigation by LeapRate, the delaying of the issuance of AFS licenses for FX brokerages, whilst financial services firms in other sectors received their AFS licenses very quickly.

Previous surveillance reports over recent six-monthly periods have contained concise detail about ASIC’s concern over the regulation of FX firms and has stated that real time surveillance of their activities has been a major focus for the regulator.

In this report which was issued today that covers the final six months of 2014, however, despite highlighting FX as being a priority for regulatory awareness in its strategic plan for 2015, the regulator has made no mention whatsoever of the FX industry in its findings over the last six months of 2014, focusing its attention on other sectors of the electronic trading industry, which include the improved functionality of ASIC’s new market surveillance system, Market Analysis and Intelligence (MAI).

A persistent pinging strategy was identified in an ASX20 security trading in ASX Centre Point and Chi-X hidden public dark venues. Following intervention by ASIC, that behaviour has now ceased. Pinging is the practice of using the placement of very small orders to test if there is liquidity.

Using MAI, surveillance analysts also identified a recurrence of hacking of retail online share trading accounts. ASIC has worked closely with the firms involved to implement strategies to disrupt this activity.

Further, between July and December 2014, discussions with market participants led to the amendment of order execution methods and the review of trading algorithms on 26 occasions. ASIC Commissioner Cathie Armour said that such examples highlighted the importance of and the manner in which ASIC was achieving positive behavioural change.

‘While enforcement outcomes are important from a deterrence perspective and send a message to industry that market misconduct will not be tolerated, ASIC’s early engagement with participants about inappropriate conduct or poor compliance is crucial to maintaining market integrity,’ Commissioner Armour said.

The report also highlighted the impact of the improved functionality of ASIC’s new market surveillance system, MAI. The system has allowed ASIC to conduct very sophisticated analysis in very short periods of time.

Greg Yanco, Senior Executive Leader of MPS, said that together with a highly-trained and qualified surveillance team with significant expertise in market mechanics, ASIC was better equipped to recognise and respond to market misconduct.

‘We can now analyse equities and derivatives data in far greater detail than the previous system allowed for. We’ve also created new insider trading and market manipulation reports to more efficiently analyse large volumes of trading data. These improved surveillance capabilities position ASIC better than ever before to detect, investigate and prosecute trading breaches,’ Mr Yanco said.

The report also outlines future areas of focus for ASIC, in particular the Market Entity Compliance System, which will enhance the way market participants and operators interact with ASIC. Other aspects of market conduct that ASIC will be paying close attention to in the coming six-month period include a thematic review of crossing systems which will assess how crossing system operators are meeting their regulatory obligations, targeted compliance reviews of client money obligations, and further analysis into the handling of confidential information.

For the official report from ASIC, click here.

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