UBS Securities Australia Limited ('UBS') has paid penalties totalling $280,000 to comply with two infringement notices given to it by the Markets聽Disciplinary Panel ('the MDP').
The first infringement notice ($140,000) relates to the operation, use and monitoring of a crossing system known as UBS Price Improvement Network ('UBS聽PIN').
The second infringement notice ($140,000) relates to incorrect disclosures in crossing confirmations about execution venue and trading as principal, and the provision of incorrect regulatory data to market operators.
Crossing systems
Chapter 4A of the ob体育 Market Integrity Rules (Competition in Exchange Markets) 2011 (the聽'Competition Rules') imposes specific requirements on participants that operate crossing聽 systems. A participant must ensure that its crossing聽system deals fairly and in due聽turn with orders. A participant must also monitor use of its crossing system for compliance with the operating procedures of the crossing system.
UBS聽operates a crossing system known as UBS聽PIN. Orders are executed within UBS PIN using algorithms that reflect the client鈥檚 strategy. UBS has the discretion to 鈥渟lice and dice鈥� the orders and enter, amend or withdraw orders, as appropriate and as determined by its algorithms to achieve best聽execution. An order is only routed to UBS PIN where there is improvement. Any orders that are routed to UBS PIN are filled based on available executable volume and, where there is insufficient executable volume, the orders are partially filled.
UBS maintained an operating procedures manual which, among other things, provided that all聽orders, irrespective of the user, are accepted by the crossing聽system and queued on the basis of time and price priority. UBS鈥� monitoring framework provided that quality assurance testing is conducted every 6 months.
The MDP has reasonable grounds to believe that UBS contravened the Competition聽Rules in relation to the following conduct:
- between 1 December 2014 and 28聽June 2015, UBS failed to ensure that UBS PIN dealt fairly and in due聽turn with orders as a result of a deficiency in the hard聽coded logic within UBS PIN which caused the unfilled portion of a number of partially executed orders routed to UBS PIN to lose time聽priority in circumstances where another order in relation to the same financial聽product with the same price parameters was resting in UBS PIN; and
- between 10 November 2013 and 28 June 2015, during which a number of half-yearly cycles of testing in relation to price and time priority took place, UBS聽did not test for the consequences of partially filled orders and therefore fell short of a reasonable standard of monitoring compliance with the operating聽procedures of UBS PIN.
The MDP found that 10 retail clients and 536 wholesale clients were affected by the loss in priority, however none of the retail clients suffered any financial loss as a result of the loss in priority, and the loss to wholesale clients was negligible.
The MDP commented that, as the trading that occurs on a crossing system is less聽transparent than the trading that occurs on a 'lit' market, it is incumbent on participants that operate crossing systems to be diligent in ensuring those crossing systems function fairly at all times.
Confirmations 鈥� Execution venue and trading as principal
Both the ob体育 Market Integrity Rules (ASX Market) 2010 (the 'ASX Rules') and ob体育聽Market Integrity Rules (Chi-X Australia Market) 2011 (the 'Chi-X Rules') require participants to disclose information about execution venue and capacity to wholesale clients that choose not to fully opt out of receiving聽 confirmations.
The disclosure about trading as principal is principally concerned with the disclosure of conflicts, including the risk of 'front running' by the participant. The disclosures about execution venue is principally concerned with disclosure about order flow. The rules in relation to confirmations promote honesty and trust in clients鈥� dealings with participants. The disclosure of incorrect information reduces investors鈥� confidence in financial聽markets.
Execution venue
The MDP has reasonable grounds to believe that UBS contravened ASX and Chi-X Rules 3.4.1 between 28 October 2014 and 22 December 2015, when UBS gave a total of 171,021 confirmations relating to crossings to a total of 22 wholesale clients that recorded the execution venue as the ASX Market in circumstances where the crossings were executed on UBS鈥� crossing systems and not on the ASX聽Market.
The cause of the issue was a system deficiency in UBS鈥� trading system known as 'Opera' in the evaluation of execution venue information sent to it by UBS鈥櫬爋rder management system.
Trading as principal
The MDP also has reasonable grounds to believe that UBS contravened ASX and Chi-X Rule 3.4.1 between 1 August 2015 and 31 May 2016, when UBS gave a total of 13,703 confirmations to a total of 123 wholesale clients that failed to correctly disclose that UBS had acted as principal when it entered into transactions as counterparty to those wholesale clients.
The cause of the issue was a system deficiency in UBS鈥� Sapphire Fast Order Entry system which resulted in all orders entered through it being tagged as 'agency' orders regardless of whether the order was submitted as an agent or as principal.
Regulatory data provided to market operators
Competition Rule 5A.2.1 of the Competition Rules is concerned with enhanced market supervision by requiring participants to provide regulatory data to market operators. The provision of this regulatory data to market operators also ensures that ob体育 is able to obtain sufficient and appropriate market data in a timely manner to enable it to monitor and detect market misconduct in light of rapidly developing technology and increasingly complex trading strategies. The provision of incorrect regulatory data to market operators impedes informed regulatory decision-making by market operators and by ob体育.
Rule 5A.2.1 requires participants to identify, among other things, whether the participant, in relation to an order and transaction, is acting as principal or as agent for a client.
The MDP has reasonable grounds to believe that UBS contravened Competition聽Rule聽5A.2.1 between 1 August 2015 and 1 June 2016 by:
- transmitting a total of 78,833 orders to the order聽books of ASX and Chi-X that included regulatory data that incorrectly reported that UBS had acted as agent for a client when it in fact had acted as principal in relation to the orders; and
- submitting a total of 924 trade reports to ASX and Chi-X (comprising 923聽trade reports to ASX, and 1 trade report to Chi-X) that included regulatory data that incorrectly reported that UBS had acted as agent for a client when it in fact had acted as principal in relation to the transactions.
The cause of the issue was the same system deficiency in UBS鈥� Sapphire Fast Order Entry system which resulted in all orders entered through it being tagged as 鈥渁gency鈥� orders regardless of whether the order was submitted as an agent or as principal.
- Download the infringement notice聽(crossing systems)
- Download the infringement notice聽(execution venue and trading as principal)聽
For each infringement notice, the compliance with the infringement notice is not an admission of guilt or liability, and UBS is not taken to have contravened subsection 798H(1) of the Corporations Act.