Question 1

What are the false or misleading appearance market misconduct prohibitions under ASX MIR 5.7.1?

Accepted Answer

ASX MIR 5.7.1 – False or Misleading Appearance A market participant must not make a bid or offer for, or deal in, any products: (a) as principal: (i) with the intention; or (ii) if that bid, offer or dealing has the effect, or is likely to have the effect, of creating a false or misleading appearance of active trading in any product or with respect to the market for, or the price of, any product; or (b) on account of any other person where: (i) the market participant intends to create; (ii) the market participant is aware that the person intends to create; or (iii) taking into account the circumstances of the order, a market participant ought reasonably suspect that the person has placed the order with the intention of creating, a false or misleading appearance of active trading in any product or with respect to the market for, or the price of, any product. Lewis: this rule applies to both cash market products and derivative market contracts (see the definition of product in ASX MIR 1.4.3). The maximum penalty prescribed for breaching MIR 5.7.1 is $1,000,000. Pursuant to ASX MIR 1.4.3, the phrase "as principal" for these purposes has the extended meaning given to that term in ASX MIR 3.2.5 (see below). The predecessor to this MIR (ASX Market Rule 13.4.1 and before that ASX Business Rule 2.2.4) was regarded by the ASX to be one of the most fundamental and important obligations of all market participants. As the ASX noted in ASX Business Rules Guidance Note 8/00 Trading Practices: "A cornerstone of fair and orderly markets is that they reflect the forces of genuine supply and demand. This concept is fundamental. ASX seeks to ensure that its markets are fair and orderly and free of manipulative trading. ASX closely monitors trading activity. There are rules regulating trading activity in ASX’s [Market] Rules and in the Corporations Act. [Market] Participants must ensure that their trading is conducted in accordance with the [Market] Rules and the Corporations Act. Aside from any disciplinary consequences, trading which is manipulative or unacceptable is damaging to ASX’s market integrity and the image and reputation of [Market] Participants themselves." Note that (b)(iii) above puts the onus on the market participant (ie the broker) to be alive to and think about whether an order is being placed to manipulate the market. They can’t just turn a blind eye to a suspicious order. The point is illustrated by the $130,000 penalty imposed in 2017 against Share Investing Limited by the Markets Disciplinary Panel. Throughout April to May 2013, a client of Share Investing, using Share Investing's automated order processing system, was trading in the shares of a small energy company. The orders appeared to be inconsistent with the client's prior trading, but consistent with the client's interest in maintaining the value of the client's holding by supporting the price of the shares. The client orders materially altered the price of the shares, including trading at the highest price on each day and/or setting the closing price. They also appeared to have been timed to create a price impact at minimal cost. The MDP found that Share Investing ought to have identified these circumstances and to have suspected that the client placed the orders with the intention of supporting or maintaining the price of the shares and of creating a false and misleading appearance of active trading or with respect to the market for, or price of, the shares, and therefore had breached MIR 5.7.1(b)(iii). See ASIC Media Release 17-035MR. The factors market participants are required to take into account under MIR 5.7.1(b)(iii) are set out in MIR 5.7.2.

Question 2

What are the factors market participants are required to take into account under ASX MIR 5.7.1(b)(iii) [considering the circumstances of an order], under ASX MIR 5.7.2?

Accepted Answer

ASX MIR 5.7.2 – Relevant Factors In considering the circumstances of the order, the market participant must have regard to ... : (a) whether the order or execution of the order would be inconsistent with the history of, or recent trading in, that product; (b) whether the order or execution of the order would materially alter the market for, or the price of, the product; (c) the time the order is entered or any instructions concerning the time of entry of the order; (d) whether the person on whose behalf the order is placed, or another person who the market participant knows to be a related party of that person, may have an interest in creating a false or misleading appearance of active trading in any product or with respect to the market for, or the price of, any product; (e) whether the order is accompanied by settlement, delivery or security arrangements which are unusual; (f) where the order appears to be part of a series of orders, whether when put together with the other orders which appear to make up the series, the order or the series is unusual having regard to the matters referred to in this rule; (g) whether there appears to be a legitimate commercial reason for that person placing the order, unrelated to an intention to create a false or misleading appearance of active trading in or with respect to the market for, or price of, any product; (h) whether the transaction, bid or offer the execution of which is proposed will involve no change of beneficial ownership; (i) the frequency with which orders are placed by a person; (j) the volume of products the subject of each order placed by a person; and (k) the extent to which a person amends or cancels an instruction to purchase or sell a product relative to the number of transactions executed for that person. Lewis: the maximum penalty prescribed for breaching MIR 5.7.2 is $1,000,000. See also ASX Market Rules Guidance Note 1 Prevention of Manipulative Trading and note the statement in that Guidance Note: "ASX interprets the phrase "no change in beneficial ownership" in light of the Corporations Act. This means ASX regards a transaction as involving no change in beneficial ownership if a person, or that person's associate, had an interest in the [cash market products] before the transaction, and has an interest in the same [cash market products] after the transaction." ASIC has said that it will seek to follow the published interpretations contained in pre-existing ASX Market Rules guidance notes, including Guidance Note 1, but will look to review them and issue replacement ASIC Guidance Notes in due course (see ASIC Regulatory Guide 214 Guidance on ASIC market integrity rules for ASX and ASX 24 markets, at para 57-58).

Question 3

True or false: market participants are required to include filters in their automated order processing systems to prevent manipulative trading?

Accepted Answer

True. ASX MIR 5.7.3 – Automated Order Processing A market participant must also comply with this Part 5.7 in respect of orders the subject of automated order processing. Lewis: this means that you need to include filters in automated order processing systems designed to prevent manipulative trading (eg to stop people from doing wash trades, placing matched orders or marking the close).

Question 4

What does the ASX Business Rules Guidance 8/00 provide about market participants' obligations around order activity?

Accepted Answer

ASX Business Rules Guidance 8/00 "A trading participant … needs to be able to show that, taking into account the circumstances of the order, it would not have reasonably suspected that the purpose of the trading was to create a false or misleading appearance. It is important that a trading participant which receives an unusual order is able to establish that it has made due inquiries and satisfied itself as to the reason for the trading. As a minimum, appropriate notations should be made on the order record or some other record as to the reason for the trading. The most reliable record of the reason for the trading would be an audio tape of the placement of the order and the enquiries the dealer or adviser made to satisfy him/herself that a prohibited intention was not present. Such a record may protect a trading participant against any allegation of a breach of [MIR 5.7]." Lewis: see e.g ASX Business Rules Guidance Note 8/00 Trading Practices. ASX also issued a convenient Summary of ASX Business Rules Guidance Note 8/00.

Question 5

When must a market participant report suspected market manipulation to ASIC under ASX MIR 5.11.1(1)?

Accepted Answer

ASX MIR 5.11.1(1) - Obligation to Report Suspected Market Manipulation to ASIC If a market participant has reasonable grounds to suspect that: (a) ... (b) a transaction or an order transmitted to a trading platform has or is likely to have the effect of: (i) creating an artificial price for trading in financial products on the market; (ii) maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on the market; (iii) creating, or causing the creation of, a false or misleading appearance of active trading in financial products on the market; or (iv) creating, or causing the creation of, a false or misleading appearance with respect to the market for, or the price for trading in, financial products on the market, whether or not the market participant is aware of: (v) the intention of any party to the transaction or order; or (vi) all of the details of the transaction or order, the market participant must, as soon as practicable, notify ASIC in writing of the details of the transaction or order (to the extent known to the market participant) and the reasons it suspects the matter set out in ... (b). Lewis: for guidance on this obligation, see ASIC Regulatory Guide 238 Suspicious activity reporting. ASX MIR 5.11.1(2) provides that a market participant is not required to notify ASIC under ASX MIR 5.11.1(1) if it has reported the relevant information to Austrac under AMLCTFA s41 or FTRA s16 (see lecture 7). Breach of ASX MIR 5.11.1 attracts a maximum penalty of $20,000. There is an equivalent requirement in the Chi-X MIR for participants in that market. There is also an equivalent requirement in Competition MIR 4A.5.2 for participants that operate a crossing system vis-a-vis transactions done on, or orders placed into, the crossing system. For completeness, ASX MIR 5.8.2 prohibits an ASX market participant from effecting any futures market transaction where the account is the same on both sides of the transaction. ASX MIR 5.8.5 also provides that when, in the opinion of ASIC, a person or two or more persons acting in concert have acquired such control of a quoted product that the quoted product cannot be obtained for delivery on existing contracts except at prices or on terms arbitrarily dictated by such persons which are unfair, harsh, or unconscionable, ASIC may: (a) for the purpose of enabling equitable settlement to be effected on these contracts, postpone (or from time to time further postpone) the times for deliveries on contracts for any such quoted product; and (b) at any time declare that if such quoted product is not delivered on any contract requiring delivery on or before the time to which delivery has been postponed such contract will be settled by payment to the party entitled to receive such quoted product or by the credit to such party of a fair settlement price determined under MIR 5.8.6. These provisions apply only to futures market transactions on the ASX market and do not apply to cash market or options market transactions (MIR 5.8.1). There are now no longer any futures contracts actively traded on the ASX market and so these provisions have no practical operation.

Question 6

What the false or misleading appearance prohibitions under ASX 24 MIR 3.1.2(1)?

Accepted Answer

ASX 24 MIR 3.1.2(1) – False or Misleading Appearance A market participant must not offer to purchase or sell a contract or deal in any contract: (a) as principal: (i) with the intention; or (ii) if that offer to purchase or sell or dealing has the effect, or is likely to have the effect, of creating a false or misleading appearance of active trading in any contract or with respect to the market for, or the price of, any contract; or (b) on account of any other person where: (i) the market participant intends to create; (ii) the market participant is aware that the person intends to create; or (iii) taking into account the circumstances of the order, a market participant ought reasonably suspect that the person has placed the order with the intention of creating, a false or misleading appearance of active trading in any contract or with respect to the market for, or the price of, any contract. Lewis: this is essentially the same as ASX MIR 5.7.1 above. The maximum penalty prescribed for breaching MIR 3.1.2 is $1,000,000. ASX 24 MIR 3.1.2(2) provides that for these purposes, a reference to a market participant offering to purchase or sell a contract or deal in any contract as principal includes a reference to offering to purchase, sell or deal in any contract on its own behalf or on behalf of: (a) a partner of the market participant; (b) a director of, company secretary of, or person who has a substantial holding in the market participant; (c) the spouse of, non-adult children of, family company of, or family trust of a partner, director, company secretary, or person who has a substantial holding in the market participant; (d) a body corporate in which the interests of one or more of the partners of the market participant singly or together constitute a controlling interest; and (e) a related body corporate of the market participant.

Question 7

What are the factors market participants are required to take into account under ASX 24 MIR 3.1.2 [considering the circumstances of an order], under ASX MIR 3.1.2(3)?

Accepted Answer

ASX 24 MIR 3.1.2(3) – Relevant Factors In considering the circumstances of the order, the market participant must have regard to ... : (a) whether the order or execution of the order would be inconsistent with the history of, or recent trading in, that contract; (b) whether the order or execution of the order would materially alter the market for, or the price of, the contract; (c) the time the order is entered or any instructions concerning the time of entry of the order; (d) whether the person on whose behalf the order is placed, or another person who the market participant knows to be a related party of that person, may have an interest in creating a false or misleading appearance of active trading in any contract or with respect to the market for, or the price of, any contract; (e) whether the order is accompanied by settlement, delivery or security arrangements which are unusual; (f) where the order appears to be part of a series of orders, whether when put together with the other orders which appear to make up the series, the order or the series is unusual having regard to the matters referred to in this rule; (g) whether there appears to be a legitimate commercial reason for that person placing the order, unrelated to an intention to create a false or misleading appearance of active trading in or with respect to the market for, or price of, any contract; (h) whether the proposed transaction, bid or offer ... will involve no change of beneficial ownership; (i) the frequency with which orders are placed by a person; (j) the volume of contracts the subject of each order placed by a person; and (k) the extent to which a person amends or cancels an instruction to purchase or sell a contract relative to the number of transactions executed for that person. Lewis: again, this is essentially the same as ASX MIR 5.7.2 above. The maximum penalty prescribed for breaching MIR 3.1.2 is $1,000,000.

Question 8

What are the enter orders with intent to trade (bona fida order entry) rules under ASX 24 MIR 3.1.3?

Accepted Answer

ASX 24 MIR 3.1.3 – Entering Orders Without an Intent to Trade A market participant must not enter orders where there does not exist an intent to trade. For these purposes, circumstances which indicate that there does not exist an intent to trade include: orders which are entered at price limits substantially higher or lower than the previous settlement price of the specific contract, or alternatively, entered with unusually large volume levels; or placement, modification and cancellation of orders during the pre-opening phase, which are entered with intent to affect the opening price of any futures or options contract. Lewis: the maximum penalty prescribed for breaching MIR 3.1.3 is $1,000,000.

Question 9

What are the wash trade rules under ASX 24 MIR 3.1.12(1)?

Accepted Answer

ASX 24 MIR 3.1.12(1) - Wash Trades A market participant must not allow trades to occur such that both sides of the trade are on behalf of the same account. Lewis: the maximum penalty prescribed for breaching MIR 3.1.12 is $100,000. MIR 3.1.12(1) does not prohibit: (a) a transaction where both sides are taken by the same market participant where the ultimate clients are different; (b) a transaction where both sides are by the same entity but acting in different capacities; or (c) a transaction where each side is for a different division of the same market participant entity which is trading separately and for different purposes (MIR 3.1.12(2)). MIR 3.1.12(3)-(5) impose a requirement on market participants to report certain wash trades to ASIC and to maintain a register of other wash trades that are not required to be reported to ASIC.

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Chapter 4: Market Conduct Rules - Market Manipulation and Related Misconduct (Market Integrity Rules) Flashcards

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