ASX TRADING ISSUES BLOG

EMAIL: asx.trading.issues@gmail.com
WEB ADDRESS: www.scribd.com/asx_trading_issues/collections

SENATE ENQUIRY SUBMISSIONS
(October - December 2013)

Re: The performance of the Australian Securities and Investments
Commission (ASIC)
Senate Submission Update 2 Forwarded Dec 9 (enclosed)

Senate Submission Update 1 Accepted Nov 8 <LINK>
Senate Submission Introduction Accepted Oct 30 <LINK>

LINKS TO SUPPORTING INFORMATION
Attachment 1.1: Background to ASIC Complaints (Expanded) <LINK>
Attachment 1.2: An Overview of ASX Trading and its Regulation <LINK>
Attachment 1.3: Trading and Regulatory Issues Identified <LINK>

ASIC Complaint 2013-1 Aug 16, 2013 <LINK>
ASIC Complaint 2013-2 Sep 16, 2013 <LINK>
ASIC Complaint 2013-3 Oct 14, 2013 <LINK>
ASIC Complaint 2013-4 Nov 4, 2013 <LINK>
Short Selling Issue Aug 22, 2013 <LINK>




DISCLAIMER: All information presented as research has been sourced from broker trading
records and registry records. While the author considers the data to be accurate and the
summaries presented as being an accurate reflection of trading, no guarantees are given
as to the reliability of data or any conclusions put forward. Investors are encouraged to
do their own Due Diligence and to make up their own minds in regard to the causes of
any trends present in trading data.
2

OVERVIEW
(Monday, December 9, 2013)

The additional Senate Enquiry Update is prompted by the results of research into the trading of a sample
of ASX200 stocks throughout October 2013 which demonstrates that systemic share price manipulation
issues are associated with the use of broker trading algorithms. The random sample that the research is
based on includes 32 stocks across various sectors and represents a snapshot of trading for these
companies. Importantly, the irregular trading brought about by the use of algorithms occurs under the
watch of the regulator and in the full knowledge of the ASX much to the detriment of smaller retail
investors and managed superannuation funds.
The research has revealed disturbing broker trading profiles that suggest algorithms enable the market to
be controlled through the creation and maintenance of artificial pricing levels in pursuit of profitable
trades from short selling strategies. Of particular concern, is that while short selling is legal, much of the
trading that accompanies short selling is likely to be ruled illegal if properly investigated.
The challenge for the Senate Enquiry is to recognize the situation and to ensure that the regulator is forced
to move quickly and effectively to address systemic problems that have resulted in a market that is
demonstrably unfair and extremely hazardous for small investors and the nations superannuation pool.
The current system advantages sophisticated investors at the expense of all other participants and it is an
intolerable situation, especially as a severely compromised share market represents a significant
impediment to a healthy and robust national economy.
The research has been made available in two additional complaints forwarded to ASIC on December 4 and
on December 6, 2013. The trading in Beach Energy over all of October has been used to demonstrate that
the snapshots of trading for 32 companies taken over 3 trading days during October are an accurate
reflection of what occurs daily. Further research will be made available in the near future as the problems
are acute and require full disclosure so that all investors can properly assess the situation for themselves.
Links to the recent ASIC complaints concerning systemic ASX trading issues are provided below:
Algorithmic Issues Concerning the Trading in 32 ASX 200 Companies
Algorithmic issues Concerning Trading in Beach Energy (October 2013)
The Senate Enquiry is placed in a strong position in that it can observe for itself how effective the regulator is
in dealing with the current systemic issues concerning all share market investors.
The algorithmic trading issues identified appear to be intimately associated with short selling, and suggest
that the share market requires at least as much attention by the Senate Enquiry as that of the banking
industry with an emphasis on ensuring that ASIC does the job entrusted to it. The problems identified have
enormous implications for the integrity of Australian financial markets. They translate to billions of dollars
unfairly removed from the market capitalizations of companies and poor returns for managed funds as
shares are lent out to ensure short selling profits for hedge funds and sophisticated traders. The extent of
trading issues and the vulnerability of superannuation investments and personal savings committed to the
share market suggests that if the Senate Enquiry is unable to effectively address the problems, then
perhaps a Royal Commission is required to put the financial markets back on a sustainable footing.
3

BACKGROUND

The current Senate submission update strikes a chord with Submission 232 by Dr Peter Brandson who has
revealed how compromised the banking system is and how ineffective ASIC has been in guaranteeing the
integrity of the system, and in protecting people from malpractice. The point was also made that it is the
criminals who tend to get favoured treatment at the expense and suffering of those who have been taken
advantage of. It is a theme that also permeates many of the Senate Enquiry submissions published to date.
Of particular relevance to the share market are the general points made by Dr Brandson regarding
corporate, white collar criminals. The comments included: a large sub-group of able bodied people will
do almost anything for money - except work honestly. any place where large amounts of money are
concentrated in a savings or investment arena - they will be there - and any place where large amounts of
money are ready for spending -they will be there. they are really just abusing their position of power
and influence in order to access other peoples money - legally and illegally.
The comments are supported by recent events in regard to global finances where abuses of privilege and
power have occurred on a massive scale. Examples include:
the large fines paid by JP Morgan arising from the sub-prime housing fiasco, as per the links JP
Morgan in record $13bn settlement with US authorities and JPMorgan close to $6 billion settlement);
the fines levied to Deutsche Bank, Citigroup, Societe Generale, JP Morgan and others over the Libor
rate fixing scandal (Refer: Big Banks Fined $2.3B Over Illegal Libor Rate Fixing);
the large fines paid by JP Morgan associated with the London Whale derivative trading scandal
(Refer: Scandals cost JPMorgan $1 billion in fines);
fines paid by banks RBS and Barclays and others in operating a cartel to fix foreign currency markets
(Refer: $1 Billion fines for collusion between banks meant to be competing with each other result); and
the resignation of 2 ASX Directors for engaging in illegal short selling activity (Refer: ASX directors
quit after being embroiled in US trading scandal )
Market manipulation has very definitely become an integral part of modern markets, and it has been shown
to occur in markets that are many times the size of the ASX. There is absolutely no reason to expect that the
ASX is able to avoid the influences of white collar fraudsters, who, when caught up with, end up pocketing
the majority of the proceeds of their schemes, simply by paying fines and usually with no admission of guilt.
The fact that they are guilty is obvious, as no innocent party would agree to pay enormous fines unless they
knew that harsher penalties would apply if the full force of the law was applied.
Certainly there is the opportunity for fraudsters to take advantages of loop holes in the way the ASX is
currently regulated and the way the ASX market is allowed to function. Research into empirical trading data
is actually suggesting that fraudulent activity is occurring through the use of algorithms in daily trading.
The additional research into trading across a number of ASX companies also suggests that the white collar
criminals referred to by Dr Brandson are likely to be responsible for setting up a system of trading that is
substantially compromised in favour of sophisticated investors at the expense of smaller retail holders and
at the expense of those with funds under management. The latter group includes Australian workers who
have a significant amount of their compulsory superannuation investments committed to the share
market. Superannuation represents a trillion dollar plus industry that is likely to be targeted by fraudulent
activity, a situation that was flagged back in May 2012 - Just how safe is your superannuation?
4

The issue which represents the elephant in the room as far as fraudulent activity on the ASX is concerned,
involves the way that short selling is able to take place. While the practice itself has been granted legal
status, many of the activities that take place that accompany short selling are likely to be illegal if properly
investigated. ASIC has the powers to do this but it would appear that it rarely uses them. Certainly, trading
in modern markets is very heavily geared towards profiting from short selling, and for that to take place
there has to be one class of investors who lose out so that profits can be stripped from the system Refer:
Short sellers ring up $72bn profit over 18 months.
The big losers when it comes to short selling are the owners of shares under custodianship where
authority is granted for shares to be lent out at the discretion of fund managers. Managed superannuation
holdings, mutual funds and other pooled funds represent the source of shares used for securities lending,
and it is these groups who are the losers when it comes to short selling.

The lending fees received as shares are lent out by custodians to hedge fund clients, institutional fund
managers and other sophisticated investors, are meagre in comparison to the substantial capital losses that
arise from short selling. It makes no sense that managed funds can be rorted in such a way, but it occurs
daily. Anomalous data trends embedded into research data reveals that short selling often has the
characteristics of fraudulent activity, but the practice is nevertheless defended by vested interests and is
supported by the regulator itself. (Refer ASIC Complaint on Short Selling on August 21, where the regulator
took no action despite obvious abnormalities in the trading that occurred on that day).

The banning of naked short selling at the time of the GFC has made little difference to the devaluation of
holdings that has occurred from short selling ever since. The fact that short selling is usually banned during
times of market turmoil says a lot about the practice, as does the allowing of short exposures to be
managed and/or covered by avoiding price discovery through off-market dealings. A system that enables
prices to be forced lower, claiming that short selling represents efficient price discovery, but then allows
short exposures to be managed without price discovery is completely unacceptable as it actually
encourages share price manipulation.

Research data suggests that the system of short selling is flawed on many levels, including regulators
allowing:
collusive trading to occur between affiliates while short positions are established through back
and forth trading without price impact;
collusive trading that results in prices being forced lower to increase the likelihood that short
positions will able to be exited profitably, and,
collusive trading that enables short positions to be covered, again without fair price discovery.

The collusive trading that takes place refers to brokers interacting exclusively through their algorithms and
being able to bypass all other orders as necessary. Algorithms provide a mechanism for shared trading
agendas to be implemented with broker algorithms automatically taking the other side of manipulative
trades. The collusive trading ensures that the market is managed in a way where transactions are directed
from designated sellers to preferred buyers which amounts to price fixing as the trades are non-genuine.
The interactions have been identified by an analysis of anomalous data trends that result from large
numbers of spurious trades.
The research findings have been forwarded to ASIC and provide an additional opportunity for the Senate
Enquiry Committee to observe how effective (or otherwise) the system of regulation actually is. Extensive
research across 32 ASX companies reveals an ASX market that is substantially compromised with
algorithms distributing trades in a manner that cannot be explained in terms other than:
non-genuine buying and selling;
the fixing and maintenance of artificial pricing levels; and
collusion and possible cartel activity.


All behaviours come under the umbrella of share price manipulation for which heavy penalties apply.
However it would appear that they receive tacit approval by both the ASX and the market regulator.

5

As mentioned in a previous submission, the usual situation when market manipulation is raised as a
concern is that after a lengthy delay, the regulator will invariably report back, (if at all), a No case to
answer verdict with no discussions or clarifications entered into. Usually there is no way of knowing
whether the regulator has even attended to the matters presented as per ex-ASIC employee Anne Lampes
experiences reported in Senate Submission 106.

RESEARCH FINDINGS:
A compelling feature of the research undertaken is that trading profiles of brokers have been established
where anomalies cannot be adequately explained without drawing on issues related to share price
manipulation. A case in point is when small amounts of selling are put through the market in a way that
causes large numbers of price falls (i.e., large numbers of Downtick transactions). That type of selling is
used regularly by a range of brokers, where the motivations identify with forcing prices lower rather than
attempting to obtain the best returns on sales as a genuine seller would seek to do. The selling is made
more dubious when it is a distinguishing feature of trading by brokers irrespective of what stocks are being
traded.

An example of dubious broker selling profiles is provided below. The daily profiles represent a mix of selling
profiles taken from the 32 companies reviewed throughout October. In each case trading is seen to have
resulted in lower prices rather than attempting to optimize the proceeds of selling (i.e., it is manipulative)


From a regulatory viewpoint, dubious selling profiles such as the above ought to be easy an matter to deal
with, as they are both readily identified and difficult to justify in terms other than manipulative trading.
Also, the usual excuse cited by ASIC for not pursuing complaints (i.e., a lack of evidence) is null and void in
examples such as the above as the brokers themselves are responsible for putting trades into the market
and are accountable for their actions irrespective of who their clients might be.

The manipulative selling trends featured are the direct result of settings supplied to selling algorithms. On
the other side of spurious trades are buyers who also demonstrate manipulative characteristics as they are
consistently able to purchase large numbers of cheaper Downtick trades from small volumes of buying
supplied to the market. Such buying is statistically unlikely if buying and selling is genuine, and suggests
preferential trades between sellers of Downticks and buyers of Downticks that are purposefully
implemented to force prices lower - preferential trading implies a rigged market.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Daily DT Sales %
All Daily Selling %

SELLING PROFILES THAT FORCE LOWER PRICES: Average Downtick Selling Profiles versus Average Selling Profiles
High levels of Downtick
sell trades arising from low
levels of selling suggests
deliberate attempts to
lower prices.
The impact on prices
is achieved by large
numbers of trades
that lower prices but
they usually involve
only very small
parcels of shares.
6

An example of buying profiles that have facilitated Downticks in price are provided in the following chart.



The tuning of algorithms together with the ability of algorithms to somehow seek each other out in trading
designed to impact prices, sits at the core of share price manipulation issues. The settings of algorithms offer
great flexibility in regard to controlling prices. Further examples are provided by algorithms that are able to
sell large volumes of shares while minimally impacting prices, as well as algorithms that are able to buy large
volumes of shares while minimally impacting prices as per the following examples.

0%
10%
20%
30%
40%
50%
60%
70%
0%
10%
20%
30%
40%
50%
60%

0%
10%
20%
30%
40%
50%
60%
BUYING PROFILES THAT FACILTATE LOWER PRICES: Average Downtick Buying Profiles versus Average Buying
Profiles
SELLING PROFILES THAT FACILTATE HIGH VOLUME SELLING WITHOUT IMPACTING PRICES
Profiles
BUYING PROFILES THAT FACILTATE HIGH VOLUME PURCHASES WITHOUT IMPACTING PRICES

Daily DT Buys %

All Daily Buying %



Daily DT Sells %
All Daily Selling %


Daily DT Buys %

All Daily Buying %



High levels of
Downtick purchases
arising from low levels
of buying suggests
collusive trading.
Strong levels of selling able to avoid falls
in price suggests collusive trading.
Strong levels of buying that misses out on
cheaper DT trades suggests collusive trading.
7

There can be no question that algorithms deliver strong levels of control over trading. Control comes from
the settings supplied to them combined with the ability to seek out and trade exclusively with partners
who take the other side of trades. The net result is to deliver pre-determined trading agendas. The
intricacies involved in their design are beyond the comprehension of most, including regulators, but the
fact that they manipulate the market is absolutely beyond question. The broker profiles queried as
manipulative in the charts are difficult to justify as being legitimate, while the profiles marked as
dubious, have every likelihood of being proven manipulative if thorough investigations were conducted.
All that is required is to ascertain the trading relationships behind the entities responsible for spurious
trades, and ASIC has the authority to do that.

It is no coincidence that successful short selling requires large volumes of shares to be exchanged without
impacting the market (i.e. the successful placing of short sales into the market), that prices then need to
be forced lower to prepare for short covering transactions, and then large volumes need to be exchanged
to allow the covering of short sales again without impacting the market. As shown above, with entities
colluding with their trading, broker algorithms can be tuned to suit all contingencies. However in doing so,
the market is heavily compromised by non-genuine buying and selling that result in artificial pricing levels.
In short, algorithms enable the market to be manipulated daily in favour of profitable short selling
campaigns.


ACCESS TO RESEARCH
In the interest of full transparency, the latest research expands on the above scenarios and has been made
available to the Senate Enquiry and the investing public together with ASIC Complaint 2013-4 which is still
under investigation. They are all available from the following links:

Algorithmic Issues Concerning the Trading in 32 ASX 200 Companies
Algorithmic issues Concerning Trading in Beach Energy (October 2013)
ASIC Complaint 2013-4

Further research is ongoing as the problems are deeply systemic and require urgent attention. Research
into trading algorithms as they impact other ASX companies will continue to be made available from the
following link.

www.scribd.com/asx_trading_issues/collections



CONCLUDING COMMENTS
The failure of the ASX and ASIC to provide a fair and transparent platform for the buying and selling of
shares is reflected strongly in the research undertaken, but also by the severe undervaluations that have
occurred in many companies since the GFC. It is also reflected by the action taken by LINC Energy CEO Mr
Peter Bond in removing his company from the ASX because of chronic undervaluations and seeking a
listing on the Singapore exchange <Linc Energy dumps ASX for Singapore>.

The recent frustrations aired by the Kingsgate Consolidated Chairman in relation to the extent of share
price manipulation allowed to take place on the ASX <Refer: LINK> is a further case in point. It has got to
the stage where share market manipulation has all but become accepted as the new norm in the eyes of
many ASX stakeholders. In acting to censure the Kingsgate Chairmans comments, the ASX has hardly
acted in a professional and transparent manner < ASX censors chairman's AGM address >. The action
suggests that they may have something to hide and it takes further credibility away from the ASX after the
recent forced resignation of two of its Directors for illegal short selling in the US market.

8

Dr Brandson also made a special plea to the Senate Enquiry team in stating Only your actions matter. The
people you represent; the people who pay you; the people who vote for you will not be impressed or
satisfied if you dont take effective action. This is your moment to shine and achieve - please use it wisely
and fearlessly.

The comment is particularly relevant as a lot of talkfest time can often result in no effective actions taken
leading to additional frustration and continuing losses for all concerned.

The enquiry needs to be resolute and dedicated towards achieving outcomes. All issues raised are critical
and require effective solutions. The enormity of current problems in a global environment where white
collar fraud has been shown to be supported by politicians, regulators, rating agencies and colluding
investment banks
1
means that doing nothing will simply encourage more of the same. Many of the
matters referred to in submissions imply that the national interest is compromised because of regulatory
failures. The Senate Enquiry in itself is an admission that ASIC has failed to perform the roles entrusted to
it. Now is the time for constructive reform.

A need already identified by the large number of submissions is for the creation of an independent board
of review where there is an avenue of appeal for situations where ASIC decisions dont appear to
adequately address the complaints put before it or where they appear to be simply ignoring complaints.
Such a panel would have gone a long way to preventing the Commonwealth Bank fiasco and it would
ensure that regulatory problems concerning the share market are properly addressed. It would also force
ASIC to be accountable for non-decisions where evidence of wrong doing is patently obvious yet nothing is
done, and where slap-on-the-hand enforceable undertakings let fraudsters of lightly compared to what
the full force of the law would be able to achieve. There is very little deterrent value in the system of
enforceable undertakings and leniency for self-admissions that ASIC heavily subscribes to, and which
leaves an impression of ASIC looking after its corporate mates rather than those infringed against.

Far reaching reforms are required with steps to ensure an equitable, fair and efficient banking system and
a share market that is actually fair and operates transparently, efficiently and with integrity - All of which
represent basic requirements that should be mandatory and absolutely non-negotiable, a situation that is
far different from the realities that currently exist.

Upon reflection, it is a mystery how the current compromised system could have remained in place for
such a long period of time. At least the enquiry now has an opportunity to rectify the situation for the
benefit of all Australians by initiating reforms that eliminate the loop holes that provide avenues for white
collar fraud to prosper in the Australian financial markets to the extent it has.














1
Eight banks including RBS and Barclays have agreed to penalties with the European Commission (EC) over allegations they
formed cartels to fix two key rates used to set the price of trillions of dollars of financial products from mortgages to complex
financial products. <Link>