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ASIC Issues AUS $775,000 Fine for Commodities Market Supervision Failings

ASIC Issues AUS $775,000 Fine for Commodities Market Supervision Failings

What Is It About

The article details a fine of AUD $775,000 imposed by the Australian Securities and Investments Commission (ASIC) on J.P. Morgan Securities Australia Limited for allowing suspicious wheat futures orders on the ASX futures market, which exhibited 'Marking the Close' behavior. This practice involves placing trades late in the session to manipulate the daily settlement price, a violation of market integrity rules.

Why It's Important

This incident underscores the crucial role of financial institutions as market gatekeepers and the dangers of over-reliance on automated surveillance systems. J.P. Morgan's failure to detect and prevent suspicious trading activities not only led to market manipulation but also damaged confidence in the ASX market. The case highlights the need for robust compliance systems that combine automated tools with expert human oversight.

Key Takeaways

Key takeaways include the importance of tailored surveillance systems, the necessity of knowledgeable staff to detect market abuse, and the critical need for timely responses to regulatory inquiries. The enforcement action also stresses that relying solely on automated systems is insufficient, and that firms must continuously update and adapt their surveillance mechanisms to evolving market conditions.

Table of Contents
Introduction
Compliance Considerations

Introduction

The Market Disciplinary Panel (MDP) of the Australian Securities and Investments Commission (ASIC), Australia’s financial regulator, fined (click here) JP Morgan Securities Australia Limited (JPMSAL) AUD $775,000 for allowing suspicious Client orders to be placed on the ASX 24 futures market.

JPMSAL permits its clients to place orders with JPMSAL which are then routed via JPMSAL's terminals to ASX 24 to trade futures contracts on the ASX 24 market. The MDP found JPMSAL should have suspected 36 orders placed by its Client between 11 January 2022 and 3 March 2022 were submitted with the intention of creating a false or misleading appearance with respect to the market for, or the price of, the Eastern Australia Wheat futures January 2023 (WMF3) contracts.

The MDP’s view was that, individually and as part of a series, the orders exhibited characteristics of an intention by the Client to manipulate the market by ‘marking the close’ (placing orders or trading close to the end of a trading session to influence the daily settlement price [DSP] of a derivate contract).

The MDP found JPMSAL should have suspected the Client’s orders were suspicious for a number of reasons, including:

  • A large proportion of the orders were entered late in the trading session, including seconds before market close;
  • A large proportion of the orders were small volume orders, including lot sizes of five or less;
  • A number of the sell orders resulted in, or may have resulted in, a decrease to the daily settlement price of WMF3 contracts, and
  • The orders were unusual in the market for WMF3 contracts when considering the history of, and other trading in that product.

The MDP found that JPMSAL’s failure to identify its Client’s trading as suspicious was ‘careless’, that JPMSAL should have detected the conduct, and should have acted more expeditiously when alerted to it by ASIC.

The enforcement decision provides insights into the email communications between JPMSAL and the Client when JPMSAL was investigating the relevant suspicious orders in question. The Client in one of its email responses noted that it was ‘protecting its short position from another party bidding up the close’ which was a red flag to ASIC.

"[the Client] was the largest participant on this contract: it often traded 100% of the volume on the days in question (2/3 of the volume traded over the considered period) and continuously selling contracts for a total of 1024 lots, at prices similar or close to the highlighted one-lot transactions…

The economic rationale for those trades is that [the Client] was protecting its short position from another party bidding up the close by entering bona fide sell orders executed within the bid and offer prices…"

ASIC responded later in the enforcement decision that this indicated potential manipulative intent by the Client.

"The rationale of placing orders to ‘[protect] its short position from another party bidding up the close’ indicates a potential manipulative intent on the part of the Client. The placement of orders for such a purpose does not reflect the genuine forces of supply or demand, and consequently, in placing the order, is likely to create a misleading appearance in the price of, and the market for, the contract."

The detailed ASIC infringement notice at 16 pages (click here) outlines specific reasons for JPMSAL’s failures referencing four key factors set out in ASIC's Regulatory Guide 216: Markets Disciplinary Panel (click here) which aids in determining the size of the penalty as follows:

  1. The character of the conduct. JPMSAL’s conduct was deemed serious by the MPA noting that i) it was a ‘gate keeper’ for the ASX market, ii) it failed to detect and promptly address suspicious trading activity (relevant suspicious orders were placed over 2.5 months), and iii) its excessive reliance on its automated surveillance systems;
  2. The consequences of the conduct. Although the monetary impact to the market was minimal, the prolonged undetected conduct damaged confidence in the ASX 24 market and triggered complaints from other participants, highlighting potential market integrity concerns;
  3. The participant’s compliance culture. Despite having robust surveillance systems and procedures in place, deficiencies were identified in JPMSAL’s surveillance programme (the alerts were not triggered for the relevant suspicious orders because one or more of the alert thresholds were not met) indicating a need for JPMSAL to diversify beyond automated detection and ensure staff possess appropriate product knowledge and expertise to be able to detect and quickly respond to any suspicious behaviour; and
  4. Remedial steps taken by the participant. While remedial steps were taken including reviewing relevant suspicious orders with the Client and enhancing its surveillance alerting systems, the MDP noted that JPMSAL should not have total reliance on its automated surveillance detection systems and should ensure that its staff have appropriate knowledge and expertise in those products.

ASIC Deputy Chair Sarah Court commented on the enforcement stressing the importance of JP Morgan’s role in upholding market integrity and signalling to the wider market participant community that relying solely on automated surveillance is not sufficient:

"There are real world consequences for this sort of behaviour which is why tackling manipulation in energy and commodities derivatives markets has been an ASIC priority.

Market participants are the gatekeepers to Australia’s markets, and they need to uphold the highest standards. They have a central role in detecting, preventing and disrupting suspicious trading activity, particularly in periods of volatility as was the case here.

The MDP’s decision emphasises that market participants cannot solely rely on automated trade monitoring systems to detect potential misconduct and must take immediate action once alerted to misconduct by ASIC."

icon_target RegTrail Insights

This is the first commodity related market abuse enforcement decision by ASIC since RegTrail began coverage in January 2021. While the enforcement relates to JP Morgan’s miss on identifying market abuse for DMA activity, it provided to a Client, the enforcement provides several lessons and key takeaways relevant to energy and commodity firms. 

  1. Reliance on Automated Surveillance is not acceptable. ASIC makes it very clear that JPMSAL should not have relied solely on its automated alerting system – Nasdaq SMARTS – to identify market abuse implying that ‘out of the box’ alerts are not enough. The suspicious trading activity went undetected for 2.5 months with relevant suspicious orders being placed on an almost daily basis.
  2. Surveillance Staff knowledge of underlying trading markets is mission critical. JPMSAL compliance and surveillance staff monitoring the market did not appear to be sufficiently familiar with the ASX Wheat product and its daily settlement pricing mechanism, which contributed to the delay between first being contacted by ASIC of the suspicious orders in question, and the Client being requested to cease such trading. During this time, the Client engaged in four additional suspicious transactions.
  3. Response times to regulatory inquiries including engagement with Traders or Clients must be expedited. The MDP noted that JPMSAL should have detected the conduct and acted more expeditiously when alerted to it by ASIC. JPMSAL should have immediately contacted the Client and required a more fulsome and expeditious response. It should also have prevented the Client from trading the product in a similar manner or restricting its DMA access. Instead, JMPSAL allowed the trading to continue.
  4. Targeted Surveillance Alert Reviews via random sampling (“four eyes review”), Monthly Team Alert Reviews, and Alert Generation Trend Analysis form part of a sound compliance surveillance culture. The MDP acknowledged that JPMSAL had a surveillance system in place and dedicated a range of resources, both personnel and procedural, to its ASX 24 compliance and surveillance programme, which was generally consistent with a sound compliance culture. In addition to its surveillance system, JPMSAL had i) targeted reviews, as well as random monthly reviews of alerts relating to spoofing, front running and manipulation of closing/settlement prices in addition to other risks, ii) random monthly review of alerts related to spoofing, front running and manipulation of closing/settlement prices in addition to other risks, and iii) Review of Alert Generation Trends. Unfortunately, the relevant suspicious orders did not generate alerts thus they were not reviewed as part of any trend analysis.
  5. Market Abuse Risk Assessments can aid in training Surveillance Staff on market dynamics and related potential market abuse. Energy and commodity surveillance teams have the opportunity to review their current surveillance operating model with respect to alignment of surveillance staff to specific markets and ensuring sufficient training on related market dynamics and possible market abuse that can take place within each specific market e.g. power, gas, coal, emissions, etc. One way to provide training is via Market Abuse Risk Assessments where either the Surveillance Analyst directly or with support from the broader Compliance team conduct assessments of specific trading desk activity with first line staff (traders) and document how markets trade and the related market abuse risks. It is important that all surveillance staff have deep understanding of the markets that they surveil.
  6. Regulators expect firms to tailor ‘Out of the Box’ alerts from third party surveillance tools to align with specific trading characteristics of a certain market e.g. low volume trading activity on ASX 24. JPMSAL’s surveillance programme had several alert types designed specifically to identify potential manipulation in proximity to the close on the ASX 24 market. This included alerts targeting High Closing Bid or Low Closing Ask, both of which were active. However, the alerts were not triggered for the relevant suspicious orders because one or more of the alert thresholds were not met. For example, the relevant suspicious orders were all at, or within, the prevailing bid/offer spread. Whilst awaiting a SMARTS system-based solution, JPMSAL created an in-house alerting tool designed to detect small-lot orders near the close, something that they had not included in their surveillance logic previously until ASIC notified them of the potential market abuse.
  7. Trader Profiling – Defining alerts to monitor anomalies of an individual trader’s activity. JPMSAL was unable to identify the suspicious orders in question because the automated surveillance alerts were not calibrated to monitor a specific trader’s individual activity over a given period e.g. 1 month compared to their normalised activity over a longer period e.g. 12 months. The average lot size traded by the Client previous to the suspicious orders was 50 compared to 1 lot for the suspicious orders. Also, the percentage volume of overall trades placed in the day window vs. the night window had significantly different weightings during normal trading compared to the suspicious trading in question. Firms monitoring for ‘Marking the Close’ or ‘Benchmark Manipulation’ market abuse where trade/order submissions can impact a daily settlement price can leverage learnings from the ASIC case and review and update, where appropriate, current alerting parameters. We review this example further and provide insights as to how to implement a solution below.

The ASIC enforcement is a reminder that firms must continuously review and update their surveillance alerting capability to tailor detection logic specific to the market being surveilled and also to review how they surveil individual trader’s activity. This includes adjustments to current alert thresholds via calibration as well as new additional alerting logic for specific use cases where a firm either adds or modifies existing trading strategies or adds new products/instruments. Change Management Frameworks (New Business Initiatives) governance is one way for Compliance to ensure that they are made aware of all new business changes taking place. 

We summarise the enforcement case facts below in further detail.

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Enjoy the read!

Table of Contents
Introduction
Compliance Considerations

Introduction

The Market Disciplinary Panel (MDP) of the Australian Securities and Investments Commission (ASIC), Australia’s financial regulator, fined (click here) JP Morgan Securities Australia Limited (JPMSAL) AUD $775,000 for allowing suspicious Client orders to be placed on the ASX 24 futures market.

JPMSAL permits its clients to place orders with JPMSAL which are then routed via JPMSAL's terminals to ASX 24 to trade futures contracts on the ASX 24 market. The MDP found JPMSAL should have suspected 36 orders placed by its Client between 11 January 2022 and 3 March 2022 were submitted with the intention of creating a false or misleading appearance with respect to the market for, or the price of, the Eastern Australia Wheat futures January 2023 (WMF3) contracts.

The MDP’s view was that, individually and as part of a series, the orders exhibited characteristics of an intention by the Client to manipulate the market by ‘marking the close’ (placing orders or trading close to the end of a trading session to influence the daily settlement price [DSP] of a derivate contract).

The MDP found JPMSAL should have suspected the Client’s orders were suspicious for a number of reasons, including:

  • A large proportion of the orders were entered late in the trading session, including seconds before market close;
  • A large proportion of the orders were small volume orders, including lot sizes of five or less;
  • A number of the sell orders resulted in, or may have resulted in, a decrease to the daily settlement price of WMF3 contracts, and
  • The orders were unusual in the market for WMF3 contracts when considering the history of, and other trading in that product.

The MDP found that JPMSAL’s failure to identify its Client’s trading as suspicious was ‘careless’, that JPMSAL should have detected the conduct, and should have acted more expeditiously when alerted to it by ASIC.

The enforcement decision provides insights into the email communications between JPMSAL and the Client when JPMSAL was investigating the relevant suspicious orders in question. The Client in one of its email responses noted that it was ‘protecting its short position from another party bidding up the close’ which was a red flag to ASIC.

"[the Client] was the largest participant on this contract: it often traded 100% of the volume on the days in question (2/3 of the volume traded over the considered period) and continuously selling contracts for a total of 1024 lots, at prices similar or close to the highlighted one-lot transactions…

The economic rationale for those trades is that [the Client] was protecting its short position from another party bidding up the close by entering bona fide sell orders executed within the bid and offer prices…"

ASIC responded later in the enforcement decision that this indicated potential manipulative intent by the Client.

"The rationale of placing orders to ‘[protect] its short position from another party bidding up the close’ indicates a potential manipulative intent on the part of the Client. The placement of orders for such a purpose does not reflect the genuine forces of supply or demand, and consequently, in placing the order, is likely to create a misleading appearance in the price of, and the market for, the contract."

The detailed ASIC infringement notice at 16 pages (click here) outlines specific reasons for JPMSAL’s failures referencing four key factors set out in ASIC's Regulatory Guide 216: Markets Disciplinary Panel (click here) which aids in determining the size of the penalty as follows:

  1. The character of the conduct. JPMSAL’s conduct was deemed serious by the MPA noting that i) it was a ‘gate keeper’ for the ASX market, ii) it failed to detect and promptly address suspicious trading activity (relevant suspicious orders were placed over 2.5 months), and iii) its excessive reliance on its automated surveillance systems;
  2. The consequences of the conduct. Although the monetary impact to the market was minimal, the prolonged undetected conduct damaged confidence in the ASX 24 market and triggered complaints from other participants, highlighting potential market integrity concerns;
  3. The participant’s compliance culture. Despite having robust surveillance systems and procedures in place, deficiencies were identified in JPMSAL’s surveillance programme (the alerts were not triggered for the relevant suspicious orders because one or more of the alert thresholds were not met) indicating a need for JPMSAL to diversify beyond automated detection and ensure staff possess appropriate product knowledge and expertise to be able to detect and quickly respond to any suspicious behaviour; and
  4. Remedial steps taken by the participant. While remedial steps were taken including reviewing relevant suspicious orders with the Client and enhancing its surveillance alerting systems, the MDP noted that JPMSAL should not have total reliance on its automated surveillance detection systems and should ensure that its staff have appropriate knowledge and expertise in those products.

ASIC Deputy Chair Sarah Court commented on the enforcement stressing the importance of JP Morgan’s role in upholding market integrity and signalling to the wider market participant community that relying solely on automated surveillance is not sufficient:

"There are real world consequences for this sort of behaviour which is why tackling manipulation in energy and commodities derivatives markets has been an ASIC priority.

Market participants are the gatekeepers to Australia’s markets, and they need to uphold the highest standards. They have a central role in detecting, preventing and disrupting suspicious trading activity, particularly in periods of volatility as was the case here.

The MDP’s decision emphasises that market participants cannot solely rely on automated trade monitoring systems to detect potential misconduct and must take immediate action once alerted to misconduct by ASIC."

icon_target RegTrail Insights

This is the first commodity related market abuse enforcement decision by ASIC since RegTrail began coverage in January 2021. While the enforcement relates to JP Morgan’s miss on identifying market abuse for DMA activity, it provided to a Client, the enforcement provides several lessons and key takeaways relevant to energy and commodity firms. 

  1. Reliance on Automated Surveillance is not acceptable. ASIC makes it very clear that JPMSAL should not have relied solely on its automated alerting system – Nasdaq SMARTS – to identify market abuse implying that ‘out of the box’ alerts are not enough. The suspicious trading activity went undetected for 2.5 months with relevant suspicious orders being placed on an almost daily basis.
  2. Surveillance Staff knowledge of underlying trading markets is mission critical. JPMSAL compliance and surveillance staff monitoring the market did not appear to be sufficiently familiar with the ASX Wheat product and its daily settlement pricing mechanism, which contributed to the delay between first being contacted by ASIC of the suspicious orders in question, and the Client being requested to cease such trading. During this time, the Client engaged in four additional suspicious transactions.
  3. Response times to regulatory inquiries including engagement with Traders or Clients must be expedited. The MDP noted that JPMSAL should have detected the conduct and acted more expeditiously when alerted to it by ASIC. JPMSAL should have immediately contacted the Client and required a more fulsome and expeditious response. It should also have prevented the Client from trading the product in a similar manner or restricting its DMA access. Instead, JMPSAL allowed the trading to continue.
  4. Targeted Surveillance Alert Reviews via random sampling (“four eyes review”), Monthly Team Alert Reviews, and Alert Generation Trend Analysis form part of a sound compliance surveillance culture. The MDP acknowledged that JPMSAL had a surveillance system in place and dedicated a range of resources, both personnel and procedural, to its ASX 24 compliance and surveillance programme, which was generally consistent with a sound compliance culture. In addition to its surveillance system, JPMSAL had i) targeted reviews, as well as random monthly reviews of alerts relating to spoofing, front running and manipulation of closing/settlement prices in addition to other risks, ii) random monthly review of alerts related to spoofing, front running and manipulation of closing/settlement prices in addition to other risks, and iii) Review of Alert Generation Trends. Unfortunately, the relevant suspicious orders did not generate alerts thus they were not reviewed as part of any trend analysis.
  5. Market Abuse Risk Assessments can aid in training Surveillance Staff on market dynamics and related potential market abuse. Energy and commodity surveillance teams have the opportunity to review their current surveillance operating model with respect to alignment of surveillance staff to specific markets and ensuring sufficient training on related market dynamics and possible market abuse that can take place within each specific market e.g. power, gas, coal, emissions, etc. One way to provide training is via Market Abuse Risk Assessments where either the Surveillance Analyst directly or with support from the broader Compliance team conduct assessments of specific trading desk activity with first line staff (traders) and document how markets trade and the related market abuse risks. It is important that all surveillance staff have deep understanding of the markets that they surveil.
  6. Regulators expect firms to tailor ‘Out of the Box’ alerts from third party surveillance tools to align with specific trading characteristics of a certain market e.g. low volume trading activity on ASX 24. JPMSAL’s surveillance programme had several alert types designed specifically to identify potential manipulation in proximity to the close on the ASX 24 market. This included alerts targeting High Closing Bid or Low Closing Ask, both of which were active. However, the alerts were not triggered for the relevant suspicious orders because one or more of the alert thresholds were not met. For example, the relevant suspicious orders were all at, or within, the prevailing bid/offer spread. Whilst awaiting a SMARTS system-based solution, JPMSAL created an in-house alerting tool designed to detect small-lot orders near the close, something that they had not included in their surveillance logic previously until ASIC notified them of the potential market abuse.
  7. Trader Profiling – Defining alerts to monitor anomalies of an individual trader’s activity. JPMSAL was unable to identify the suspicious orders in question because the automated surveillance alerts were not calibrated to monitor a specific trader’s individual activity over a given period e.g. 1 month compared to their normalised activity over a longer period e.g. 12 months. The average lot size traded by the Client previous to the suspicious orders was 50 compared to 1 lot for the suspicious orders. Also, the percentage volume of overall trades placed in the day window vs. the night window had significantly different weightings during normal trading compared to the suspicious trading in question. Firms monitoring for ‘Marking the Close’ or ‘Benchmark Manipulation’ market abuse where trade/order submissions can impact a daily settlement price can leverage learnings from the ASIC case and review and update, where appropriate, current alerting parameters. We review this example further and provide insights as to how to implement a solution below.

The ASIC enforcement is a reminder that firms must continuously review and update their surveillance alerting capability to tailor detection logic specific to the market being surveilled and also to review how they surveil individual trader’s activity. This includes adjustments to current alert thresholds via calibration as well as new additional alerting logic for specific use cases where a firm either adds or modifies existing trading strategies or adds new products/instruments. Change Management Frameworks (New Business Initiatives) governance is one way for Compliance to ensure that they are made aware of all new business changes taking place. 

We summarise the enforcement case facts below in further detail.

Compliance Considerations

Case Overview

ASIC’s derivative surveillance team emailed JPMSAL a table of 46 late orders submitted by JPMSAL on the Client’s account ID in WMF3 during the period 13 December 2021 to 18 February 2022 and queried the nature of the trading. The table showed that:

  • The Client's orders were generally entered late (close to market close) and in small lot sizes;
  • 45.65% were entered in the final 10 seconds of the trading session; and
  • 10 out of the 46 orders (21.74%) were entered for the size of only one lot.

Following JPMSAL’s receipt of the email, JPMSAL commenced an investigation. This included seeking an explanation from the Client. The Client however continued to place four late orders for small lot sizes between 24 February 2022 and 3 March 2022.

On 28 February 2022, the ASX issued a ‘Request for Information’ (RFI) to JPMSAL via email in relation to nine one lot trades in WMF3 during February 2022. The request sought information in relation to, amongst other things, whether the orders were entered on behalf of a Client, the strategy behind the trading activity, whether the activity appeared on JPMSAL’s surveillance systems and details about any investigation undertaken by JPMSAL into the trading activity.

JPMSAL emailed the Client seeking an explanation behind the submission of the nine one lot trades and noting that these orders set the closing price in WMF3 for each day the orders were respectively entered. The Client’s initial response to JPMSAL’s email stated:

"Offers were entered at levels we were comfortable with selling. Evidently most of these are now well below the current market level…

We are not aware of lot size minimums…

Liquidity in new crop markets is traditionally quite mixed and often wide this far out from its harvest…

If there are bids in the market then they are fair game to hit, just as it would be fine for bids to jump across the spread to trade the offer."

Several days later, the individual trader that entered orders on behalf of the Client, made the following statements via email in response to JPMSAL’s queries:

"[the Client] has been hedging a long physical Australian wheat position by constantly building up a large short position of WMF23 on ASX since October 2021 (at the end of the considered period [the Client] held a net short position of 2603 lots of WM FY23)…

[the Client] was the largest participant on this contract: it often traded 100% of the volume on the days in question (2/3 of the volume traded over the considered period) and continuously selling contracts for a total of 1024 lots, at prices similar or close to the highlighted one-lot transactions…

The economic rationale for those trades is that [the Client] was protecting its short position from another party bidding up the close by entering bona fide sell orders executed within the bid and offer prices…

The orders were also in line with the underlying physical market, i.e. VIC track for January 2023 delivery (ASX Grains futures contracts are based on the Grain Trade Australia No 2 Contract, otherwise known as a ‘Track’ contract, which provides standard terms and conditions for the trade of grain within Australia)…

There was no intention to manipulate the close."

Alleged Breaches – Rule 3.1.2(1)(b)(iii) & Rule 3.1.2(3)

Rule 3.1.2(1)(b)(iii) (false and misleading appearance)

Rule 3.1.2(1)(b) of the Rules provides:

"(1) A Market Participant must not offer to purchase or sell a Contract or deal in any Contract: 

(b) on account of any other person where: 

(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."

Per the Enforcement Decision, JPMSAL did not identify a set of suspicious orders placed by the Client over a two-month period and exhibited ‘marking the close’ abusive behaviour violating Rule 3.1.2(1)(b) as follows:

  • The Client placed 42 suspicious relevant orders for WMF3 between 13 December 2021 and 3 March 2022. The MDP was concerned that the suspicious relevant orders, individually and as part of a series of orders, exhibited characteristics of an intention by the Client to ‘mark the close’ of the daily settlement price and thereby create a false or misleading appearance with respect to the market for, or the price of, the WMF3 contract.
  • The MDP considered that JPMSAL breached Rule 3.1.2(1)(b)(iii) by permitting the last 36 of the 42 Relevant Orders to be placed, via its terminal, on the ASX 24 market for WMF3 between 11 January 2022 and 3 March 2022.

Rule 3.1.2(3).

In addition to violating Rule 3.1.2(1)(b)(iii), JPMSAL was also in violation of Rule 3.1.2(3). Rule 3.1.2(3) is broken down into 11 sub-components of which JMPSAL violated six.

We review the first sub-component and the MDP justification for JPMSAL’s violation however those interested in reviewing the case in further detail are advised to read the Infringement Notice in its entirety starting at page five to view further details for each of the other sub-rules. The six sub rules that JPMSAL violated include:

  1. MIR 3.1.2(3)(a) - History of or recent trading in that Contract;
  2. MIR 3.1.2(3)(b) - Whether the Order or execution of the Order would alter the market for, or the price of, the Contract;
  3. MIR 3.1.2(3)(c) - The time the Order is entered;
  4. MIR 3.1.2(3)(j) - the volume of Contracts the subject of each Order placed by a person;
  5. MIR 3.1.2(3)(f)) - where the Order appears to be part of a series of Orders, whether when put together with 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 subrule; and
  6. MIR 3.1.2(3)(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.

[1] MIR 3.1.2(3)(a) - History of or recent trading in that Contract

The MDP provide further background as to the Client’s historic transaction history (‘Initial Period’) and how the suspicious relevant orders were traded differently during that two-month period (‘Relevant Period’) where JPMSAL should have identified these transactions in its surveillance system.

Trading during the Initial Period

  • Between 27 October 2021 and 12 December 2021 (Initial Period), the Client entered 38 orders in WMF3, all of which were sell orders.
  • During the Initial Period, the 38 sell orders were entered across both the day and night trading sessions (29 orders were placed in day trading sessions and nine orders were placed in night trading sessions).
  • For the Client’s 29 orders entered during the day trading session in the Initial Period:
  1. The Client entered orders on 10 out of the 33 days (30.30%);
  2. The Client’s orders ranged between 50 to 100 lots, with an average of 82.76 lots; and
  3. Only one out of the 29 orders (3.45%), was entered in the final five minutes of the day trading session. This order was entered approximately four minutes and 30 seconds from market close. This was the latest time that the Client entered an order during the day trading session during the Initial Period

Trading during the Relevant Period

  • The Client’s order and trading activity during the Relevant Period (which includes the relevant suspicious orders) had the following characteristics:
  1. A significant proportion of the Client’s day-session orders were entered late in the session, several of which were entered seconds before market close;
  2. A significant proportion of the Client’s day-session orders were small volume orders, several of which were entered in lot sizes of five or less;
  3. A number of the Client’s sell orders resulted in, or may have resulted in, a decrease to the DSP; and
  4. The Client entered late and small lot sell orders near the end of the day trading session frequently and, from 17 January 2022, it entered late sell orders on almost every trading day in the balance of the Relevant Period.

MCP concluded that the relevant suspicious orders were unusual in the WMF3 market when considering the history of, and other, trading in that product, given that:

  • The Client’s behaviour during the Initial Period was different in some respects to its behaviour during the Relevant Period; and
  • The Client’s pattern of submitting late and small-lot orders near the market close only occurred in the day trading session (being the trading session that determines the DSP), not the night trading session.

icon_target RegTrail Insights

Monitoring trading activity of a specific trader over a relevant period and identifying anomalies to their trading activity is usually not easy to implement in practice. 

Typically, surveillance alerts supportive of monitoring this type of behaviour include alerts that will create a ‘benchmark’ period which outlines an average trade / order activity view for a specific individual over a set period of time e.g. 6 months and then will compare that trader’s activity for a specific time period e.g. 1 month to the 6 month historic average and flag if there is a potential change in trading activity e.g. percentage increase in traded volume. 

Firms monitoring for ‘Marking the Close’ or ‘Benchmark Manipulation’ market abuse where trade/order submissions can impact a daily settlement price can leverage learnings from the ASIC case in order to review and update where appropriate their current alerting parameters. 

Specifically, firms can review and update their alerting suite logic to enable the ability to review a trader’s activity with respect to the following metrics over a short time period e.g. 1 month: 

  • The count of trades / orders placed; 
  • The timing of those trades/orders e.g. trade/order time stamp; and 
  • The price of those trades/orders in relevance to the bid/offer spread.

The alert would then compare these statistics with a historic benchmark that calculates the average of these metrics over a longer time period e.g. 12 months and flag if there is a percentage change for each. Firms may also wish to consider dynamic, statistical-based thresholds which adjust in line with changing market characteristics. Static thresholds, while easy and intuitive to understand, also carry significant downsides.

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