Post: J.P. Morgan Securities $775,000 penalty for market gatekeeper failure

Following an ASIC investigation, the Markets Disciplinary Panel (MDP) has fined J.P. Morgan Securities Australia Limited (JPMSAL) $775,000 for permitting suspicious client orders to be placed on the futures market, ASX 24.

The MDP found JPMSAL should have suspected 36 orders placed by a client between 11 January 2022 and 3 March 2022 were submitted with the intention of creating a false or misleading appearance with respect to the market for, or the price of, the Eastern Australia Wheat futures January 2023 (WMF3) contracts.

ASIC Deputy Chair Sarah Court said, ‘There are real world consequences for this sort of behaviour which is why tackling manipulation in energy and commodities derivatives markets has been an ASIC priority.’

‘Farmers use these contracts to manage wheat price fluctuations which can affect what Australians pay at the checkout.

‘Market participants are the gatekeepers to Australia’s markets, and they need to uphold the highest standards. They have a central role in detecting, preventing and disrupting suspicious trading activity, particularly in periods of volatility as was the case here.

‘The MDP’s decision emphasises that market participants cannot solely rely on automated trade monitoring systems to detect potential misconduct and must take immediate action once alerted to misconduct by ASIC,’ Ms Court said.

The MDP’s Infringement Notice outlines that, ‘this case highlighted the responsibility of all market users to pro-actively draw attention to potential rule breaches in order to maintain market integrity, and the importance of timely communication between regulators, market participants and clients to ensure that any potential misconduct is rectified immediately once detected’.

The MDP’s view was that, individually and as part of a series, the orders exhibited characteristics of an intention by the client to manipulate the market by ‘marking the close’ (placing orders or trading close to the end of a trading session to influence the daily settlement price of a derivate contract).

The MDP found that JPMSAL’s failure to identify its client’s trading as suspicious was ‘careless’, that JPMSAL should have detected the conduct, and should have acted more expeditiously when alerted to it by ASIC.

The MDP found JPMSAL should have suspected the client’s orders were suspicious for a number of reasons, including:

a large proportion of the orders were entered late in the trading session, including seconds before market close,
a large proportion of the orders were small volume orders, including lot sizes of five or less,
a number of the sell orders resulted in, or may have resulted in, a decrease to the daily settlement price of WMF3 contracts, and
the orders were unusual in the market for WMF3 contracts when considering the history of, and other trading in that product.
JPMSAL cooperated with ASIC’s investigation and did not contest that it had breached Rule 3.1.2(1)(b)(iii) of the ASIC Market Integrity Rules (Futures Markets) 2017.

JPMSAL has complied with the Infringement Notice and paid the fine.

Compliance with the infringement notice is not an admission of guilt or liability and by doing so, JPMSAL is not taken to have contravened subsection 798H(1) of the Corporations Act.

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