Instinet fined over HFT breach in Australia
Australia’s securities regulator has fined Instinet A$130,000 ($117,700) for failing to reject or report stock manipulation by a high-frequency trader despite being alerted by internal reports.
The Australian Securities & Investments Commission (Asic) found Instinet, an agency broker and the equities execution arm of Nomura, in breach of market integrity rules dating back to 2010.
It noted on its website that Instinet had failed to place an appropriate filter to reject more than 600 wash-trade crossings from a trader between October and November 2010.
These are illegal trades where there is no change in beneficial ownership; effectively the trader is operating on his own account to make a stock appear heavily traded.
Instinet was aware such wash trades could have taken place at the time as it was alerted by an internal order surveillance system that reports risks daily. However, none of the crossings were cancelled or reported to the Australian Securities Exchange (ASX) to request cancellation.
“Instinet ought to have identified the regulatory risk associated with [wash trades] on the basis of… reports [produced by its internal surveillance system] and [it should have] escalated the issue – including immediately requesting the ASX cancel the [wash trades],” states Asic.
It added that while the breach involved only one contravention of rules, it was not considered an isolated incident, because it involved 672 trades over 21 days. “Instinet’s conduct continued for an unacceptable and extended period of time in the circumstances,” it says.
Asic notes that Instinet did not put a risk filter in place until September last year, and said it found this misconduct careless and irresponsible. “Its failure to ensure that it had appropriate automated filters in place has the potential to damage the efficiency and integrity of the market,” it states, saying the agency broker risked undermining public confidence in the market.
The regulator did not identify the high-frequency trading firm involved, while Instinet declined to comment on the case when contacted by AsianInvestor.
But a source close to Instinet notes that such a filter is only relevant to the ASX. He adds that the breach took place more than two years ago, and that company management is satisfied with the firm’s risk management and compliance in all the markets it operates in.
Instinet has paid the fine to comply with the infringement notice from Asic’s markets disciplinary panel. The agency broker also operates in Hong Kong, Singapore, Malaysia, Thailand, Taiwan, Indonesia and India.