Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, September 2015.

Your questions answered

In this month's newsletter, Greg Yanco (Senior Executive Leader, Market and Participant Supervision, ASIC) answers questions submitted by SAA members.

What are the three main areas ASIC is focussing on with respect to stockbroking?

In August 2014, we published our six-monthly report on the supervision and surveillance of Australian financial markets and market participants: Report 405 ASIC supervision of markets and participants: January to June 2014 (REP 405). REP 405 highlights a number of areas of future focus for ASIC, including ongoing work aimed at identifying and correcting deficiencies in the treatment of confidential information by listed entities. We previously wrote about this issue in the June edition of this newsletter, and it remains a major priority for us.

We are continuing to design, test and release additional alerts and reports in the Markets Analysis and Intelligence (MAI) surveillance system. ASIC staff have been meeting with market participants to showcase MAI's increased functionality, most recently in the area of futures surveillance and the latest insider trading and market manipulation reports.

We continue to monitor and respond to challenges posed by changing market dynamics and technical advancements, especially in respect of high frequency trading (HFT) and dark pools. Achieving positive outcomes through fair and transparent policy and regulations for HFT and dark pools remains our goal.

Is ASIC seeing any evidence of latency arbitrage between ASX, Chi-X and dark pools in Australia?

No. A number of short term traders operate on the ASX and Chi-X markets and many of them run extremely fast connections into the two exchanges. These traders manage their orders and risks using automated programs and are capable of reacting to price and order book changes with very low latencies. We have profiled how these traders react to price changes across these venues. We observed some trading programs which did appear to be overly sensitive to price changes and did have the potential to contribute to market volatility. Where appropriate we raised our concerns with the responsible participants and they modified their programs to act in a manner consistent with their obligation to maintain orderly markets. However, we have not observed behaviour consistent with a profit-driven arbitrage pricing strategy. We have not seen traders setting themselves up to profit strategically from pricing errors or price differentials on break-outs.

During 2012 and 2013, there were a number of traders running short term 'flip' strategies out of participant dark pools. These traders would consistently trade against 'dark' orders and immediately flip those orders back into the exchanges for half a tick. At its peak, this style of trading represented up to 30% of turnover within at least one participant's dark pool. These strategies were not 'latency arbitrages' - the traders involved did hold risk while unwinding. At the time, ASIC expressed concern with representations made to clients on the nature of liquidity sourced within the pools. We felt that users of those pools should be aware that many of the counter quotes were driven by short term traders, and that liquidity sourced within the pools was being immediately hedged on exchange - often in competition with the originating order. Much of this type of short term trading (originating within participant dark pools) has since ceased.

Will ASIC be requiring ADA 1 renewals this year or next year? If so, how will these be administered?

Current accreditations, including Level 1 and Level 2 Accredited Derivatives Advisers, Accredited Advisers (who were formerly known as 'Perpetual' advisers under ASX arrangements) and Accredited Futures Advisers, are due for renewal on the 28^th of November 2014 (the renewal date). Market participants will be required to nominate accredited advisers for renewal before the renewal date. Accredited advisers not nominated for renewal will cease to be an accredited adviser as of the renewal date.

ASIC will not require accredited advisers to sit examinations as part of the 2014 renewal process. We would, however, like to remind participants of their obligations under section 912A(1)(e) and (f) of the Corporations Act 2001 to ensure that all representatives are adequately trained and competent. ASIC will advise market participants of the 2014 renewal process, including key dates, in due course. In the meantime, Regulatory Guide 146 Licensing: Training of financial product advisersdetails ASIC's expectations in relation to the ongoing training of advisers (see Chapter F).

Will ASIC mandate a DTR education standard, and if so, when?

Designated Trading Representatives (DTRs) play an important role in ensuring our markets remain fair, orderly and transparent. This is reflected in the fact that breaches of the rules around DTRs, including qualification of DTRs, may attract penalties of up to $1,000,000.

ASIC is concerned about the ongoing incidence of erroneous entries of orders which affect the market. 'Fat finger' errors, in particular, continue to be over-represented. However, we are not aware of any direct link between the type, or source, of training undertaken by DTRs and breaches of the ASIC market integrity rules.

In the current regulatory environment, we are required to ensure that the cost burden of any new regulatory obligations is fully offset by reductions in existing regulatory burden. At present, we do not think that there is sufficient evidence to intervene by mandating training and registration requirements for DTRs. Nonetheless, we will continue to highlight the requirement for market participants to ensure that their DTRs are suitably qualified and experienced.

Is ASIC progressing its plans for a national exam for advisers?

ASIC considers that the current system for assessing the competency and training of financial advisors is unsatisfactory. In our submissions to the Senate Inquiry into the performance of ASIC (Senate Inquiry) and the Financial System Inquiry (FSI), we recommended the introduction of a national examination for advisors who provide Tier 1 (broadly speaking, more complex) product advice. The introduction of an objective standard is, in our view, the most effective and transparent way to determine whether advisers have met a minimum standard of competency.

This recommendation (and the issues it raises) appears to be gaining traction. In mid-July 2014, the Parliamentary Joint Committee on Corporations and Financial Services announced that it would inquire into various proposals calling for a lifting of professional, ethical and educational standards in the financial services industry. Later that month, the Senate Inquiry adopted ASIC's recommendation on this issue in its Final Report. More recently, the FSI called for submissions on the introduction of a national examination for financial advisors providing personal advice in its Interim Report.

Ultimately, however, this is a matter for the Government to progress. We will of course participate in any inquiry into this issue and provide submissions at that time in line with our previously stated position.