ASIC issues infringement notice to Interactive Brokers over client’s manipulative stock trading

Maria Nikolova

Interactive Brokers has paid a penalty of $250,000 to comply with the notice.

Electronic trading firm Interactive Brokers LLC has paid a penalty of $250,000 in order to comply with an infringement notice given to it by the Australian Securities and Investments Commission (ASIC).

Interactive Brokers operated an Automated Order Processing (AOP) system that allowed clients to enter Orders into the Chi-X Market and the ASX Market. Depending on best execution, the Orders would be submitted either to the Chi-X Market or routed to a related body corporate of Interactive Brokers for entry into the ASX Market. A client of Interactive Brokers placed a series of bids for shares in Altona Mining Limited (AOH) throughout November and December 2013 using the AOP system.

During November 2013, the client placed 39 Bids through the AOP system—17 Bids were submitted to the Chi-X Market and 26 Bids were routed to the ASX Market, with 4 of those Bids being split between those two markets. The Bids reflected a particular pattern of trading, namely, the Bids that resulted in trades:

  • represented 6.57% of all trades in AOH on both markets but caused 73% of all price increases from the last traded prices of AOH; and
  • only consumed between 0.03% and 24% of AOH that was the subject of Offers at the respective Bid prices.

Also, 22 Bids were for very small volumes of AOH which traded in a way that caused price increases from the last traded price, whereas 31 Bids resulted in trades causing price increases of 0.25c and 0.5c, including to the highest price, or equal to the highest price, at which AOH traded on the particular Trading Day. The investigation found that 13 Bids were placed within 15 minutes of decreases in the price of AOH shares.

During December 2013, the pattern of trading of the client in relation to bids for AOH seen during November continued. In December, the client placed 22 Bids through the AOP system—9 Bids were submitted to the Chi-X Market and 13 Bids were routed to the ASX Market. The Bids reflected the same or similar pattern of trading, namely the 22 Bids caused 19 price increases from the last traded price, and created 16 price increases with Bids valued at less than $150.

The MDP has reasonable grounds to believe that Interactive contravened Rule 5.7.1(b)(iii) on the basis that a Market Participant in Interactive’s position during the relevant period ought reasonably to have suspected that the Bids submitted through Interactive’s AOP system to Chi-X by the client by way of a course of conduct were placed by the client with the intention of creating a false or misleading appearance with respect to the market for, or the price of, AOH shares.

ASIC’s Market Disciplinary Panel accepts that some of the Bids placed by the client during November and December appeared to be genuine Bids to acquire AOH shares. Generally, these Bids were for larger volumes (eg 20,000, 50,000 and 100,000) which resulted in trades that did not impact on the price of AOH shares.

However, a number of Bids placed by the client seemed consistent with an intention to support the share price of AOH because those Bids appear to have been timed to create a price impact at minimal cost. These Bids seemed inconsistent with the actions of a genuine purchaser seeking to acquire AOH shares at the best possible price because the resulting trades consumed a very small proportion of the AOH shares on offer at the Bid prices. The client had an interest in supporting the share price of AOH, given the client’s significant indirect holding in AOH. The penalty payable for this contravention is $170,000.

The rest of the monetary penalty stems from the MDP’s findings that Interactive Brokers’s compliance framework lacked sophistication, and its management lacked the required level of focus to ensure compliance with the Rules. Interactive Brokers’ systems, procedures and resources, when benchmarked against those of its peers, were inadequate, the MDP states. For instance, the pre-trade filters failed to detect a series of Bids of very low value. Interactive Brokers was unaware of the suspicious trading by the client. ASIC detected the suspicious trading and brought it to the attention of Interactive. The MDP rejects any suggestion that, because the market will correct itself, this is justification for not having systems to detect low value Bids creating price increases.

The penalty payable for this contravention is $80,000.

The compliance with the infringement notice is not an admission of guilt or liability, ASIC notes.

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