ASIC has announced details of the latest matter reviewed by the Markets Disciplinary Panel (MDP). This serves as a timely reminder to all market participants to ensure that their trading systems have adequate controls in place to prevent erroneous orders entering the market.

In this case, Citigroup paid a $40,000 fine for an incident that occurred in late 2011 involving order placed on the ASX24 Market by a client with Direct Market Access. The client placed an order that was executed well away from the published daily settlement price. Citigroup’s trading system should have had filters and warnings in place to identify that the order was too far away from the current market. The order should have been rejected.

Following its investigation, the MDP believed that Citigroup breached Rule 2.2.1(1)(b) of the Market Integrity Rules for the ASX24 Market. This rule requires participants to demonstrate ‘prudent risk management procedures’. In particular, participants should establish and document limits for orders, positions and maximum price changes. Limits must be applied to orders for both client and house accounts.  See full details of ASIC’s announcement here.

What does this mean for me

Financial markets are dominated by technology and ASIC has demonstrated its focus on ensuring that trading is fair and orderly. There are a number of Market Integrity Rules (ASX, Chi-X and ASX24) that require participants to maintain control of their trading systems. For participants of these markets, it is important that you consider:

  • Does your trading system have adequate filters and controls in place?
  • Have you regularly reviewed and tested these filters and controls?
  • Are your procedures documented and current?
  • Do you have appropriate security and change management arrangements in place?

AOP System Annual Review and Notification

You should also be aware that a new Market integrity Rule is taking effect this year. Participants of the ASX and Chi-X markets must complete an Annual Review of their AOP Systems by the 1st November each year. Participants must then make an Annual Notification to ASIC with respect to their compliance with the Market Integrity Rules.

Regulatory guidance and supervision

The Citigroup incident is the 21st Infringement Notice issued by ASIC since they assumed control of market supervision in August 2010. Whilst this is the first Notice for breach of this particular Market Integrity Rule, many previous Notices were for breaches of similar rules on the ASX Market. For example, we have seen several breaches for failing to ensure that:

  • Markets remain fair and orderly (MIR ASX 5.9.1)
  • AOP systems have appropriate automated filters in place so as to avoid interfering with market integrity (MIR ASX 5.6.1)

ASIC released guidance on risk management for ASX24 participants in August 2013. Regulatory Guide 250 was issued soon after the release of new and updated Market Integrity Rules for the ASX24 Market. One of the new rules extended existing risk management requirements to house accounts as they previously only covered dealing for client accounts.