Etrade Australia Securities Limited pays $55,000 infringement notice penalty


Etrade Australia Securities Limited (Etrade) has paid a penalty of $55,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP). The penalty was for failing to prevent the entry into the ASX Trading Platform of an erroneous order which resulted in a market for SPDR MSCI Australia Select High Dividend Yield Fund units not being both fair and orderly.
Background and circumstances

The MDP was satisfied that on 24 June 2013, prior to the commencement of trading on the ASX Market of the Exchange Traded Fund or ETF units in the SPDR MSCI Australia Select High Dividend Yield Fund having ASX code ‘SYI’ the ASX purged from the Order Book all existing orders in SYI following an announcement made at 9:42:25 entitled ‘Final Distribution Announcement’. The distribution was finalised as $0.17374, and the last traded price on commencement of trading was the closing price on the previous Trading Day in SYI at $27.15.

At 10:17:13, Etrade received from a client by Direct Market Access or DMA, an order to sell 225 SYI at $19.92 (Initial Order). Immediately prior to the Initial Order, the market for SYI was $20.00/no ask/$27.15 (Bid/ask/last traded price). On receipt, the Initial Order triggered Etrade’s automated ‘orderly market’ filter on its Automated Order Processing or AOP system (as it was more than 5% away from the last traded price of $27.15) and was diverted to an Etrade Designated Trading Representative or DTR (Etrade DTR 1) for assessment with the following alert or warning message ‘instruction received will move the market if executed’ (Pre-trade Alert).

After assessing the Initial Order (by giving consideration to certain factors, including the Pre-trade Alert and the market for SYI), at 10:18:13, Etrade DTR 1 submitted the Initial Order into the ASX Trading Platform being an Order to sell 225 SYI at $19.92 (Relevant Order).

The Relevant Order traded immediately in full resulting in a Market Transaction for 225 SYI at $20.00, for a total consideration of $4,500 (Relevant Transaction). The entry into the ASX Trading Platform of the Relevant Order, resulting in the Relevant Transaction, caused the price of SYI to decrease from $27.15 to $20.00, representing a $7.15 or 26% decrease in the price of SYI.

At 10:18:14, Etrade received the following post-trade alert (Post-trade Alert) notifying it of the Relevant Transaction ‘executed an on-market trade which moved the SYI price from $27.15 to $20.00 which represents a movement of 26% (compared to the threshold of 6.40%)’. At 10:59:21, another DTR from Etrade (Etrade DTR 2) considered the Post-trade Alert and decided to take no action. At 11:09:00, prompted by a telephone call from the ASX, a third DTR from Etrade (Etrade DTR 3) then requested by email to the ASX that the Relevant Transaction be cancelled.

At 11:14:29, the ASX by its direction cancelled the resulting Market Transaction under procedure 3210 of the ASX Operating Rules Procedures at the relevant time, as it occurred within the Extreme Trade Range or ETR.

By reason of Etrade’s entry of the Relevant Order into the ASX Trading Platform on 24 June 2013, the MDP had reasonable grounds to believe that Etrade contravened Rule 5.9.1 of the ASIC Market Integrity Rules (ASX Market) 2010 (MIR 5.9.1), and thereby contravened subsection 798H(1) of the Corporations Act 2001 (Corporations Act) which requires compliance with the market integrity rules. The MDP issued Etrade with an infringement notice specifying a penalty of $55,000.

In deciding this matter, the MDP noted that MIR 5.9.1 is aimed at promoting confidence in the integrity of the market. Imposing a strict obligation on Market Participants not to do anything which results in a market for a Product not being both fair and orderly, is critical in maintaining the integrity of the market.

The misconduct had the potential to damage the reputation and integrity of the market, as the submission of the Relevant Order into the ASX Trading Platform caused the price of SYI to decrease from the last traded price of $27.15 to $20.00, representing a $7.15 or 26% decrease.

Additionally, ASIC deemed the misconduct as being negligent on the part of Etrade as the functions of Etrade DTR 1 were not exercised to the requisite high standard when Etrade DTR 1 did not take care in assessing the Initial Order, before submitting the Relevant Order into the ASX Trading Platform.

The MDP noted in this matter that Etrade DTR 1 received and considered the Pre-trade Alert prior to the Relevant Order being submitted into the ASX Trading Platform, however, this did not prevent the misconduct the subject of this matter. An important aspect of the role of the DTR, as an internal control, is to take proper care and pay proper attention and diligence in the consideration of pre-trade alerts or warnings especially in circumstances where the alert triggered is in relation to an Order received through an AOP system via DMA. Taking care and paying attention and diligence to prevent the entry of Orders into the Trading Platform that could result in a market that is not both fair and orderly, is a critical measure in maintaining the integrity of a market.

Although not impacting cancellation of the Relevant Transaction, the MDP also noted in this matter that Etrade DTR 2 received and considered the Post-trade Alert after the Relevant Transaction but failed to take any action. Another important aspect of the role of the DTR, as an internal control, is to take proper care in addition to paying proper attention and diligence (including taking proper care and paying proper attention and diligence in the consideration of post-trade alerts or warnings) to promptly attend to cancellation of Market Transactions as required. This is also a critical measure in maintaining the integrity of a market.

Only after a telephone call from the ASX, did Etrade through Etrade DTR 3 then request cancellation of the Relevant Transaction via email to the ASX. This email was sent approximately 50 minutes after the Relevant Transaction. Notwithstanding this, the ASX thereafter cancelled the Relevant Transaction under its direction.

The MDP is satisfied that there was one breach of MIR 5.9.1 and that the misconduct was an isolated incident. It was also concluded that Etrade did not derive any actual or potential benefit as a result of the misconduct.

Etrade took steps to prevent recurrence of the breach, including counselling Etrade DTR 1 in relation to the Relevant Order and managing ETF Orders in general retraining all its DTRs on the management of ETF Orders, and reviewing and revising its DTR procedures.

Etrade had no previous contraventions found against it by the MDP regarding non-compliance with the market integrity rules, but had previously been sanctioned by the ASX Disciplinary Tribunal on eight separate occasions since 2004 – one regarding the predecessor rule to MIR 5.9.1 that involved a DTR (ASX Circular 365/09 dated 30 October 2009).

Etrade co-operated with ASIC throughout its investigation and did not dispute any material facts. Etrade agreed not to contest the matter, thereby saving time and costs that would otherwise have been expended.

To view the entire release by ASIC, click here.

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Etrade Australia Securities Limited pays $55,000 infringement notice penalty

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