Michael Aitken

The Australian Securities & Investments Commission has extended its crackdown on the security of confidential information held by advisory firms. ASIC has also issued a consultation paper (CP145) examining Australian equity markets

Following the transfer of market supervision from the Australian Securities Exchange to ASIC, the watchdog says ‘insider’ lists obtained from advisers during investigations have revealed hundreds of people with access to confidential, market-sensitive information. A report on its market supervision function has revealed there were 35 referrals to the regulator’s deterrence team, up from 17 in the five months to December last year.

While the point is that the process is clearly more effective with the regulator operating both the surveillance technology and the investigations, the hard part in the sense of the number of false positive technology alerts that has to be investigated is doing ASIC no favours.

ASIC is working with one hand behind its back, and quite possibly two.

One hand is tied up – because there is no disclosure of client information in the trade records. This would make it much easier to profile clients and therefore spot unusual activity, and by comparison with the current means of operating would be like shooting fish in a barrel.

Secondly, another matter of prime concern is front running. This is another form of insider trading where the inside information is client trading activity. Besides insider trading (on corporate information) and market manipulation, broker-client conflict (of which front-running is the prime example) is one of three key prohibited trading behaviours.

ASIC is again working with one hand behind their back.

If brokers are not required to say if the are acting as principle or agent on the trading records, there is no prima facie way that a piece of technology can identify possible breaches which places ASIC in a worse position than with insider trading. There at least they can use the technology to give them a clue.

This all means Front Running – one of the three key prohibited trading behaviours – is not being monitored.

It would be good if Treasury took this into account when they make changes to the way the market operates such as are being contemplated under CP145.

Michael Aitken is the Chair of Capital Market Technologies at the Australian School of Business.