Gatekeepers must keep our markets safe

In February 2022, Russia’s invasion of Ukraine sent shockwaves across the globe.

This human tragedy resonated with many Australians, as its impacts reverberated through economies worldwide.

Wholesale energy prices soared, and wheat prices rose, contributing to near-record food price hikes and energy bill costs.

Yet amidst the volatility, we noticed suspicious trading around the market close, impacting the daily settlement prices in the ASX 24 energy and wheat futures markets.

Macquarie Bank has complied with an infringement notice* of $4.955 million for failing to prevent suspicious orders placed by three of their clients during this period.

This is the largest infringement notice ever issued in the history of the Markets Disciplinary Panel.

The Markets Disciplinary Panel found it had reasonable grounds to believe Macquarie breached Market Integrity Rules 50 times from January to September 2022, by allowing its clients to place orders which Macquarie ought to have reasonably suspected were intended to create a false or misleading appearance around the price of contracts in the ASX 24 electricity futures market.

All of the orders were placed within the final minute or seconds of market close and pushed the daily settlement price in a direction favourable to the client - a practice known as “marking the close”.

The panel found the conduct was serious, prolonged, and potentially systemic. It could have hurt not only traders, but everyday people, impacted by the increased cost of living and paying more at the meter.

The panel was also critical of Macquarie’s slowness to act on alerts from ASIC regarding suspicious activity on the electricity futures market, and its initial attempt to blame the issue on a hard coding error in its third-party surveillance software, Nasdaq SMARTS.

Regardless of the origin, this is a major failure by a major gatekeeper – and is reflected in the historic magnitude of the penalty.

The integrity of our financial markets is underpinned by gatekeepers, who make important decisions everyday about who is allowed access to markets and the way that access occurs.

Gatekeepers are in a unique position to address potential misconduct. They have direct visibility over trading and can prevent orders from being placed on the market, in a way that ASIC, as the markets regulator, can't.

We rely on a pantheon of gatekeepers to keep our financial markets operating fairly and efficiently – from bankers and market participants to securities dealers and corporate advisers.

When gatekeepers fail in their duties, it puts the entire system at risk – and it is ASIC’s job to hold them to account for these failures.

J.P. Morgan Securities Australia recently complied with a $775,000 infringement notice from the Markets Disciplinary Panel*, following an ASIC investigation, for permitting suspicious client orders to be placed on the ASX 24 futures market with respect to the price for Eastern Australia Wheat futures contracts across the early days of the Ukraine invasion.

In this case, the panel found J.P. Morgan relied too heavily on the SMARTS system to detect suspicious trading. The message here is you can outsource your surveillance system, but you can’t outsource your obligations under the Market Integrity Rules.

There is a real-world cost to manipulation in energy derivatives markets, which is why we made it an enforcement priority area in 2022.

We recently commenced civil penalty proceedings against COFCO International Australia Pty Ltd and COFCO Resources SA, alleging the companies manipulated the ASX 24 market for Eastern Australia Wheat futures.

But gatekeepers are also stewards of market integrity. When they do their job well, everyone benefits. It is thanks in part to good gatekeepers that Australians can invest in one of the cleanest markets in the world – where investors can participate with confidence and where companies can raise capital with certainty.

Suspicious trading of this kind is a dirty mark on Australia’s record and hurts investors and confidence in our markets more broadly. We all have a role to play in preventing this conduct.

There will always be those who try to turn a crisis into a profit. This is a nearly five-million dollar reminder to all market participants that they need to shut the gate on this kind of suspicious behaviour.