Merrill Lynch Equities (Australia) Limited pays $65,000 infringement notice penalty 

The Australian Securities and Investments Commission (ASIC) has imposed the penalty of $65,000 to Merrill Lynch Equities (Australia) Limited (Merrill Lynch) in order to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP). The penalty was for failing to prevent the entry into the ASX Trading Platform of an erroneous Order which resulted in a market for RIO Tinto Limited ordinary shares not being both fair and orderly.

Background and circumstances

The MDP was satisfied that:

1. On 8 August 2011, at approximately 11.24 am, a Merrill Lynch Designated Trading Representative or DTR (Merrill Lynch DTR) entered an Order into the ASX Trading Platform for the sale of 6,985 of a Tailor-Made Combination (RIO TMC), at a net price of one cent each (Relevant Order). The Relevant Order, in effect, comprised an instruction to:
sell 6,985 units being 698,500 ordinary shares in RIO Tinto Limited ACN 004 458 404 (RIO), and
buy 6,985 RIO $77.00 call option contracts that expired on 27 October 2011 (RIOWV7).

2. The Relevant Order was erroneous because the Merrill Lynch DTR had intended to enter an Order to sell one RIO TMC, comprising an instruction to sell one unit (comprising a sell of 100 RIO) and to buy one RIOWV7, at a net price of $69.85.

3. Immediately prior to the entry of the Relevant Order into the ASX Trading Platform, the market for RIO was as follows:
the Bid/ask/last traded price – $71.40/$71.41/$71.42, and
the Bid schedule for RIO contained Bids for a total of about 211,400 RIO at prices between $71.40 and $50.00.

4. The net price at which the Relevant Order was entered did not accurately reflect material information relevant to and genuine supply for, the relevant component product, RIO.

5. The Relevant Order executed on the ASX Trading Platform against opposing Orders for the RIO TMC in the Tailor-Made Combination (TMC) market; and by the matching of derived Orders (RIO Sell Orders) generated by the ASX trade matching engine (the algorithm used for the purposes of TMC Orders), against opposing Orders in the markets for the components, RIO and RIOWV7.

6. The execution of the Relevant Order resulted in 337 Market Transactions for the sale of RIO at prices from $71.40 to $1.43, of which 162 Market Transactions for the sale of 270,600 RIO executed at prices from $1.91 to $1.43 through trading of the RIO Sell Orders with Bids in the market for RIO, although not necessarily in price/time priority (Relevant Transactions).

7. But for the entry of the Relevant Order, the RIO Sell Orders would not have been generated and would not have been able to trade in the market for RIO at prices between $1.91 and $1.43, as described above.

8. The execution of the Relevant Order resulted in a significant decrease in the price of RIO which did not accurately reflect material information relevant to the price of RIO in that:
the price of RIO decreased by $69.99 or 98% below the last price at which RIO had traded immediately prior to the entry of the Relevant Order, and
the market for RIO varied significantly having regard to the market for RIO which existed immediately before and after the Relevant Order.

9. The error was identified by Merrill Lynch’s trading desk and Merrill Lynch compliance monitoring. At approximately 11.36 am, Merrill Lynch contacted ASX, advised that the Relevant Order had been entered in error and requested that the error be referred to the ASX Dispute Governors Committee (DGC). The DGC subsequently convened and recommended that all Market Transactions in RIO at $64.35 or below be cancelled.

10. ASX directed the cancellation of all Market Transactions in RIO which had been executed between 11.24 am and 11.27 am, at or below $64.35. One hundred and seventy two of the 337 Market Transactions, including 10 Market Transactions executed against opposing Orders for RIO TMC and each of the 162 Relevant Transactions, were cancelled pursuant to ASX’s direction. A further 28 Market Transactions for RIO, which executed at prices above $64.35, were cancelled with counterparty agreement.

By reason of Merrill Lynch’s entry of the Relevant Order into the ASX Trading Platform on 8 August 2011, the MDP had reasonable grounds to believe that Merrill Lynch contravened MIR 5.9.1, and thereby contravened subsection 798H(1) of the Corporations Act 2001 (Corporations Act) which requires compliance with the market integrity rules. The MDP issued Merrill Lynch with an infringement notice specifying a penalty of $65,000.

In deciding this matter, the MDP noted the following:

• MIR 5.9.1 is aimed at promoting confidence in the integrity of the market. Imposing a strict obligation on Market Participants not to do anything which results in a market for a Product not being both fair and orderly, is critical in maintaining the integrity of the market.
• The misconduct had the potential to cause widespread detriment, impact public confidence, and damage the reputation and integrity of the market, as the entry of the Relevant Order into the ASX Trading Platform caused the price of RIO to decrease from the last traded price of $71.42 to $1.43, being a $69.99 or 98% decrease in the price of RIO. In this regard, the MDP noted the market prominence of RIO, not only within the ASX Market, but also other secondary markets.
• The misconduct was inadvertent on the part of Merrill Lynch as the Merrill Lynch DTR failed to properly exercise his functions to the requisite high standard when he incorrectly transposed price and volume, before submitting the Relevant Order into the ASX Trading Platform.
• In this matter the Merrill Lynch DTR, after keying the Relevant Order into an ASX Trader Workstation did not receive any price variation warning messages or alerts prior to the Relevant Order being submitted into the ASX Trading Platform. Notwithstanding this, the MDP reiterated that an important aspect of the role of the DTR is to pay proper attention and diligence to prevent the entry of Orders into the Trading Platform that could result in a market that is not both fair and orderly. This is a critical measure in maintaining the integrity of a market.
• Merrill Lynch did not derive any actual or potential benefit from the breach, although the breach had the potential to cause detriment to counterparties whose transactions were cancelled.
• The breach was isolated.
• Merrill Lynch promptly identified the error and took action to remedy the breach, including following ASX Operating Rules Procedures to cancel the Relevant Transactions. As a result, the 162 Relevant Transactions were cancelled pursuant to ASX direction.
• Merrill Lynch took the following remedial measures to prevent recurrence of the breach:
  • stopped trading in stock/option TMCs until a review of the controls in place was undertaken
  • undertook a review of the controls available on the ASX Trading Platform and other possible controls in relation to TMCs
  • following the above review, an enhanced procedure for the placement of stock/option TMCs was implemented, requiring an additional level of oversight and approval
  • provided training on the general market integrity rule obligations and specifically on the newly implemented procedure to all staff involved in the placement of TMCs, and
  • actively engaged with ASX in relation to enhancements to filter capabilities in relation to the placement of TMCs.
• Merrill Lynch had one prior contravention found against it by the MDP for non-compliance with the market integrity rules.
• Merrill Lynch had 10 disciplinary sanctions recorded against it by the ASX Disciplinary Tribunal since 2005. This included Merrill Lynch having previously been sanctioned by the ASX Disciplinary Tribunal regarding the predecessor rule to MIR 5.9.1 in ASX Circulars 446/10 (dated 9 December 2010) and 117/10 (dated 6 April 2010).
• The MDP had regard to Merrill Lynch’s compliance history and noted that notwithstanding the inadvertent human error in this matter, it could not overlook that this followed a series of compliance failures. The MDP also noted its previous comments in MDP Infringement Notice No. MDP07/13 (dated 22 October 2013), ‘…that, repeat contraventions in similar or comparable matters will not be viewed favourably’.
• Merrill Lynch co-operated with ASIC throughout its investigation and did not dispute any material facts.
• Merrill Lynch agreed not to contest the matter, thereby saving time and costs that would otherwise have been expended.

Source: ASIC

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