ASIC Fines DMA Provider for Failing to Prevent Market Abuse in Power and Wheat Futures

ASIC, the Australian financial market regulator, announced (click here) an enforcement action against Societe Generale Securities Australia Pty Limited (SocGen) for failure to identify and report abusive activity in power and wheat futures conducted on the ASX 24 exchange by two of its direct market access (DMA) customers. This is not the first such “gatekeeper” enforcement action from ASIC. This case announced in September 2024 against Macquarie Bank bears several similarities to the latest case.

The failings are described in commendable detail in this 20-page Infringement Notice. The underlying abusive activity involved marking the close behaviour where SocGen failed to identify and report 33 suspicious orders placed in power and wheat futures over three distinct periods between May 2023 and February 2024. SocGen – reported to be the second largest trader on ASX 24 – was fined AUD $3.88 million (approximately USD $2.55 million) by the ASIC Market Disciplinary Panel (MDP).

Salient facts from the case as outlined in the Infringement Notice are summarised below. This summary is longer than usual given the amount of useful detail provided by ASIC into the underlying activity, as well as its detailed thought process for reaching its penalty conclusions.

• The Notice refers to “Client One” and “Client Two” – these being the DMA customers of SocGen who were responsible for the market conduct in question. The Notice also delineates the illicit behaviour into three distinct periods as specified below;

• During this period 16 Electricity Futures Orders were placed in the order book from between 1 and 15 seconds before market close;
• The orders impacted the daily settlement price of the electricity futures contracts in a direction favourable to Client One by between 0.19% and 3.23% creating a mark-to-market benefit range of roughly AUD $7,614 to AUD $450,432;
• ASIC received a suspicious activity report (SAR) from another market participant on 7 June 2023 for suspected marking the close behaviour for two electricity contracts on 5 June 2023 which involved Client One – it is not clear who this party represented;
• ASIC contacted SocGen on 28 July 2023 and requested information in relation to a series of orders entered in the last two minutes before market close that appeared to have impacted the daily settlement price (this included the Electricity Futures Orders in question);
• SocGen responded to the above request advising that it had reviewed the orders of Client One according to the Trading Principles under Chapter 3 of the Market Integrity Rules (MIR – click here) and did not identify any issues;
• ASIC held a meeting with Client One (that was also attended by SocGen) on 8 December 2023 to discuss its concerns about the suspicious order activity - SocGen duly advised that it had banned Client One from trading in the last two minutes prior to market close;
• ASIC wrote to SocGen on 19 December 2023 expressing concern about its ability to detect and address manipulative trading behaviour executed through its terminals and advised of its expectation that the bank reviews the adequacy of its supervisory processes and alerts;
• ASIC also advised that SocGen should make its own assessment of the legitimacy of Client One’s trading;
• In response to ASIC’s 19 December 2023 correspondence, SocGen advised ASIC on 1 March 2024 that it had not observed manipulative conduct across the period in question.

• On 9 October 2023 a suspicious Wheat Futures Order was placed 30 seconds before market close which impacted the daily settlement price by 0.37% in a direction favourable to Client Two, creating a mark-to-market benefit of AUD $101,250;
• On 10 October 2023, another suspicious Wheat Futures Orders was placed in the last 30 seconds of trading, impacting the daily settlement price in a direction beneficial to Client Two by 0.49% and creating mark-to-market benefit to Client Two of AUD $135,000;
• ASIC emailed SocGen on 18 October 2023 inquiring about the series of orders entered by Client Two and whether they had raised any compliance concerns;
• As part of the inquiry, ASIC also asked for the details of any investigation undertaken by SocGen and whether there had been any previous compliance engagements with that DMA client;
• ASIC followed up on the above seeking an official request for information (RFI) on 25 October 2023 in relation to Client Two’s suspicious trading activity;
• On 31 October 2023 another suspicious Wheat Futures Order was placed by Client Two in the last 30 seconds of trading which impacted the daily settlement price in its favour by 0.64% and created a mark-to-market benefits of AUD $154,000;
• SocGen emailed ASIC on 2 November 2023 stating that it had tightened its surveillance controls by switching on an existing (but not yet activated) alert in its Nasdaq SMARTS surveillance system designed to identify orders entered in the last minute of trading and establishing the closing price for the day (the pattern is named as Entry of High Closing Bid or Low Closing Ask for those Nasdaq users);
• ASIC noted a cessation of Client Two’s marking the close activity during the subsequent period of between 1 November 2023 and 31 December 2023.

• Client Two entered another 14 Wheat Futures Orders between 2 January 2024 and 23 February 2024 ranging from between two and 16 seconds before market close;
• Each of the above orders impacted the daily settlement price of the wheat futures contract in a favourable way to Client Two ranging from between 0.41% and 2.23% creating a mark-to-market benefit of between AUD $37,680 and AUD $744,975.

• The ASIC MDP determined that SocGen breached Rule 3.1.2(1)(b)(iii) by permitting the Electricity and Wheat Futures Orders to be placed on ASX 24 during the periods outlined above;
• The MDP concluded that SocGen ought to have reasonably suspected that the orders were placed with the intent of creating a false or misleading appearance with respect to the price of the relevant ASX 24 electricity and wheat futures contracts by impacting the daily settlement price in those contracts;
• The MDP cited the circumstances below in reaching its conclusions:

1] Timing of orders:

• All of the suspicious Electricity and Wheat Futures Orders were placed within the last minute of the market close;
• Several of the late orders were matched with existing orders that had been resting in the market for a considerable time suggesting, according to ASIC, that they were placed to influence the settlement price rather than being genuine orders;
• Regarding the Wheat Futures Orders in the third period, Client Two was the only participant entering orders in the contract during the final minute of trading (both outrights and spreads).

2] Impact on the market:

• All the suspicious orders specified above significantly impacted the daily settlement prices of the respective contracts;
• Two of the Electricity Futures Orders were notified to ASIC by an unnamed market participant given their suspicious nature and impact on the market.

3] Pattern of trading:

• The suspicious orders demonstrated a pattern that consistently moved the settlement price in a direction that improved the clients’ respective mark-to-market positions;
• The first to sixth Electricity Futures Orders were Client One’s only orders in that contract for that day and it was not active in the market in those contracts prior to entering these orders;
• Orders 17 to 24 and 30 to 33 in the Wheat Futures Orders were Client Two’s only orders in that contract for that day and it was not active in the market prior to entering these orders;
• Most of the suspicious orders in both commodities sent to the market that traded did so with resting orders in the market;
• Client One had waited until the final seconds to enter the opposing side and traded with the pre-existing order.

4] Client’s interest in impacting the market:

• The suspicious orders that resulted in executions impacted the settlement price in a favourable direction for the clients resulting either in an increased mark-to-market profit or reduced mark-to-market loss;
• This also likely resulted in lower margin requirements for both clients indicating a positive motivation for their behaviour (and likely to the detriment of others in the market).

5] Lack of commerciality:

• Several of the suspicious orders evidently lacked commercial rationale;
• In many cases the orders were asks where there had been bids placed earlier at higher prices, or vice versa (i.e. bids where there had been asks placed earlier at lower prices).

6] Regulatory enquiries into clients’ trading:

• The RFI sent on 28 July 2023 regarding the suspicious electricity futures (notably preceding the October occurrence of the suspicious Wheat Futures Orders) put SocGen “on notice” about potential marking the close behaviour and the need for it to review its surveillance practices;
• ASIC raised specific concerns with SocGen regarding the first batch of suspicious Wheat Futures Orders entered by Client Two on 18 October 2023 – the prompt went unheeded;
• ASIC wrote to SocGen on 19 December 2023 (preceding the final batch of suspicious Wheat Futures Orders) flagging concerns regarding the inadequacy of its surveillance alerts and processes – again, the prompt went unheeded.

7] Volatility in the futures market

• In June 2022 and March 2023 ASIC put the market “on notice” via its Market Integrity Updates (click here and here) regarding the increased volatility in futures markets;
• The notices urged “gatekeepers” like SocGen to closely monitor their client trading activity and to check the adequacy of their trade surveillance alerts and processes;
• ASIC also contacted energy trading firms, including SocGen, on 2 June 2022 regarding the issue of volatility on electricity markets;
• On 4 November 2022 ASIC published (click here) its Enforcement Priorities which highlighted its concerns regarding poor market conduct in energy and commodities futures markets.

Penalty Determination:

• The Infringement Notice describes its method for determining SocGen’s penalty based on the four factors set out in ASIC Regulatory Guide 216: Markets Disciplinary Panel (RG216 – click here and see page 17);
• The four factors address the character of the conduct, the consequences of the conduct, the participant’s compliance culture and any remedial steps taken by the firm. Below several observations from each of the above four factors are summarised:

1] Character of the conduct:

• ASIC considered SocGen’s conduct during the first period to be careless;
• The 16 Electricity Futures Orders placed by Client One over two months were placed in an illiquid and potentially high risk market;
• SocGen had previously identified Client One as a ‘high-risk’ client that was to be subject to enhanced due diligence with periodic reviews on an annual basis;
• ASIC had warned firms about increased volatility in markets and urged them to monitor client trading activity that may have the effect of manipulating prices;
• SocGen was also put on notice by ASIC of the heightened need to monitor the electricity futures market given the volatile markets;
• SocGen received five alerts in relation to the Electricity Futures Orders but closed them without escalation;
• ASIC was concerned that an important marking the close alert was not activated in the surveillance system at the time of the Electricity Futures Orders – especially given the high volatility at the time;
• Firms must be aware of, and responsible for, orders placed using DMA – SocGen’s monitoring of client trading should incorporate preventative and detective tools and possess the right expertise and surveillance software to meet its gatekeeper obligations;
• ASIC was concerned that SocGen’s staff did not have the appropriate skills and up-to-date expertise and understanding of the ASX 24 electricity futures market;
• DMA providers like SocGen should ensure that its clients are competent and aware of their obligations by offering ongoing education and regular reassessments of competence.

• ASIC considered SocGen’s conduct during the second period to be careless;
• Like for the electricity futures market, the wheat futures market was an illiquid market;
• ASIC emailed SocGen after the first two Wheat Futures Orders asking if the orders had raised any compliance concerns;
• No escalation within SocGen to its trading operations or risk management functions had occurred;
• ASIC expects that communications from the regulator should trigger a firm to make a detailed analysis of the trading, the client and its conduct – especially when DMA is involved.

• ASIC considered SocGen’s conduct during the third period to be reckless;
• SocGen had received ASIC’s queries and a notice regarding Client Two’s trading during the second period;
• ASIC had a meeting with Client One 8 December 2023 with SocGen where they noted that Client One was banned from trading in the last two minutes prior to market close;
• ASIC wrote to SocGen on 19 December 2023 expressing concern about its surveillance alerts and processes;
• Despite the above concerns, Client Two was allowed to place the 14 suspicious Wheat Futures Orders in the third period;
• The surveillance improvements requested in December 2023 by ASIC did not prevent the subsequent suspicious orders from occurring;
• Despite generating seven alerts, all were analysed and closed without further investigation or escalation;
• ASIC noted that the additional training provided to relevant surveillance staff had clearly been ineffective in helping them to detect suspicious behaviour;
• Any sort of oversight by SocGen’s management over ASIC’s concerns were evidently lacking;
• SocGen did not take appropriate and timely action which would likely have prevented the Wheat Futures Orders in the third period from occurring.

2] Consequences of the conduct:

• Client One and Two’s margin position benefitted from the change in the manipulated futures prices, with those on the other side of the price movement losing;
• Manipulation in electricity and wheat futures markets may have impacted the costs for businesses and consumers;
• This type of activity is a threat to the integrity of derivatives markets, including undermining the confidence in the daily settlement price and the market more generally;
• Manipulative orders can harm the reputation of the contract and the ASX 24 futures market altogether;
• ASIC considered SocGen’s conduct to be an aggravating factor.

3] Compliance culture:

• ASIC noted that there had been no previous or subsequent infringement notices issued to SocGen which it considered a mitigating factor;
• SocGen relied too heavily on its SMARTS surveillance alerts and the expertise of its first-level surveillance analysts, who did not adequately respond to or escalate matters;
• The MDP were “alarmed” at the lack of overall effectiveness of SocGen’s compliance and surveillance framework and functions (including those based offshore);
• ASIC note that when surveillance and compliance staff are based offshore, firms must ensure that the staff adequately understand the products and rules of the market they serve;
• When immediate reporting lines are to offshore based staff, those staff should be available to immediately respond to concerns during local business hours in the local time zone;
• The compliance framework in place at SocGen was not effective to prevent the manipulative orders pointing to a systemic failure across this compliance framework (the degree of management oversight of the surveillance function was specifically cited);
• ASIC considered SocGen's compliance culture to be an aggravating factor in relation to the third period.

4] Remedial steps:

• While SocGen took some remedial steps in relation to the abusive conduct, the steps taken were ineffective and did not address the underlying issue;
• While SocGen banned Client One from trading in the last two minutes prior to market close, this was only after ASIC made enquiries about late orders and over two months after those enquiries were sent;
• No such steps were taken in relation to Client Two at the time, and its activity was not restricted;
• While on 2 November 2023 SocGen advised that it had turned on a previously unused alert, ASIC raised concern that this alert was not already activated;
• The new alert triggered on seven Wheat Futures Orders in the third period, but these were closed without action with the MDP noting that:

"..SMARTS is a tool that is only as good as its users’ skills and knowledge. Automated alerts are ineffective unless they are reviewed by staff with sufficient expertise to identify potentially suspicious conduct for follow-up and/or escalation. In this case, the staff did not have the necessary expertise and it appeared that there was no management oversight to check on alert events or assessments in relation to this client"

• Reliance on automated alerts is not always sufficient and there may be situations where manual oversight of client conduct is needed - especially when clients are using DMA;
• Active management oversight of the surveillance functions was lacking including, as a minimum, periodic spot checks by management particularly where there are known concerns from regulators regarding particular client activity;
• ASIC considered the lack of sufficient, timely or effective remediation was an aggravating factor.

Penalty