ASIC puts insider trading under the microscope

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[co-author: Daniel McGuiness]

The Australian Securities and Investments Commission (ASIC) has announced that its new $43.7 million next generation market surveillance system has become operational. The system, known as Market Analysis Intelligence (MAI), will allow ASIC to monitor up to one billion order changes per day. On this basis, MAI will have sufficient capacity to monitor trades where algorithmic trading* and high frequency trading** are becoming more prevalent in Australia. 

What has changed?
This represents a significant upgrade in comparison to ASIC's previous capabilities in detecting insider trading and other market misconduct prohibitions. Under the old system, when a suspicious trade occurred, ASIC would request that the broker provide a list of their clients who participated in the trading of that security on the day in question. ASIC would then undertake the labour-intensive task of manually matching the suspicious trades against the relevant individual/s provided by the broker. In contrast, MAI will enable ASIC to monitor significant amounts of data relating to a single investor in real time. This will allow ASIC to determine more efficiently, and effectively, who in particular is gaining from trades prior to company announcements and, in doing so, targeting its resources to investigate accordingly.

Will it work?
The introduction of MAI is a welcome development in protecting the integrity of Australia's financial markets. Detection of suspicious transactions in near real time is indicative of ASIC's desire to put insider trading and other market misconduct prohibitions under the microscope. 

However, detection alone does not, of itself, lead to successful prosecutions. What remains unclear is how MAI will assist ASIC (if at all) in collecting evidence. Specifically, 'knowledge' of an insider that has made a prohibited trade; that is, that a person directly or indirectly traded in a financial product and that person knew, or should reasonably have known, that the trade was a result of insider information, is inherently difficult to prove. This is an essential proof element in establishing insider trading under the Corporations Act 2001 (Cth). 

Whether the introduction of MAI will ultimately lead to ASIC successfully bringing more prosecutions into insider trading or other market misconduct prohibitions is uncertain. Having said this, we would expect that the introduction of MAI will:

  • provide ASIC with the ability to increase the frequency of targeting investigations into allegations of insider trading, as well as other market abuse prohibitions, even if such investigations are ultimately not pursued to court; and
  • be used along aside ASIC's other investigative tools (such as obtaining telecommunication interception warrants and search warrants in conjunction with the Australian Federal Police) that may secure more successful prosecutions. 

What does this mean for you?
We believe that listed entities will inevitably need to allocate additional resources in order to respond to ASIC's investigations of insider trading and other market misconduct prohibitions - even if they are not directly involved.  While this may lead to increased compliance costs for listed entities, the cost to market participants resulting from market abuse activities far outweighs any additional administrative requirements and associated compliance costs that may result from ASIC's new MAI system. 

* Where trading orders are executed by brokers using an algorithm containing pre-programmed trading instructions in relation to certain variables (for eg. timing, price and quantity) in relation to a tradable security which are usually executed without human intervention.

** Where sophisticated technology and automated computer algorithms are used by brokers to execute trading orders and where such orders may only be held for a matter of seconds, or fractions of a second, with the broker's computer trading in and out of positions hundreds of thousands of times per day.