ASIC: Instinet Australia Pty Limited Pays $130,000 Infringement Notice Penalty

Instinet Australia Pty Limited (Instinet) has paid a penalty of $130,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP). The penalty was for not having in place at all times, as required, an appropriate automated filter in its Automated Order Processing (AOP) system to address the issue of wash trades or trades where there is no change in beneficial ownership (NCBO). 

Background and circumstances

1. From 22 October 2010 to 26 November 2010 (inclusive), Instinet sent Orders on behalf of a client through its AOP system, which would either allow the Orders to be submitted onto the ASX Trading Platform or reject them according to certain automated filters.
2. From 22 October 2010 to 28 October 2010, Instinet executed 17 Crossings on behalf of a client through its AOP system.
3. From 29 October 2010 to 26 November 2010 (Relevant Period), Instinet executed a further 672 Crossings on behalf of the client through its AOP system.
4. The Crossings involved no change of beneficial ownership as the client of Instinet was trading on behalf of their own account.
5. The Orders submitted by the client that resulted in the Crossings, were not rejected as a result of triggering any automated filters.
6. During the Relevant Period, Instinet created SMARTS Monitoring File Notes, which, among other things, detailed the total number of possible NCBO trades.
7. The 26 SMARTS Monitoring File Notes established that during the Relevant Period there were 860 possible NCBO trades, with the 672 Crossings during that period included in the 860 possibilities.
8. None of the Crossings were cancelled, nor reported to the ASX requesting cancellation.

As a result of Instinet’s failure to have in place at all times an appropriate automated filter in its AOP system to address the issue of NCBO trades, at least from the beginning of the Relevant Period, the MDP had reasonable grounds to believe that Instinet contravened Rule 5.6.1(a) of the ASIC Market Integrity Rules (ASX Market) 2010 and thereby contravened section 798H(1) of the Corporations Act 2001 (Corporations Act). The MDP issued Instinet with an infringement notice specifying a penalty of $130,000.

In deciding this matter, the MDP noted the following:

• Instinet's failure to ensure that it had appropriate automated filters in place had the potential to damage the efficiency and integrity of the market. The failure to ensure that AOP systems or direct market access systems have these requisite safeguards, risks undermining public confidence in the market.
• The trades with no change in beneficial ownership did not represent genuine, bona fide trades in the Market, but gave the appearance that they were. As such they interfered with the integrity of the Market and proper functioning of the ASX Trading Platform.
• Instinet was on notice of the NCBO Crossings due to its SMARTS daily post trade reports that reported NCBO trades.
• In the circumstances, Instinet ought to have identified the regulatory risk associated with the Crossings on the basis of the SMARTS reports and escalated the issue – including immediately requesting the ASX cancel the NCBO trades.
• While the breach involved one contravention, it consisted not of an isolated incident, but involved 672 trades occurring over 21 days. Instinet’s conduct continued for an unacceptable and extended period of time in the circumstances.
• Instinet did not take timely action to rectify the breach. It was not until sometime after 28 September 2012 that Instinet included an NCBO filter in its AOP system.
• The MDP found that in all the circumstances of the matter, Instinet's misconduct during the Relevant Period, was careless and irresponsible in the context of its regulatory obligations.
• Instinet cooperated with ASIC throughout its investigation.

The Markets Disciplinary Panel