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17-185MR UBS Securities pays $280,000 in infringement notice penalties

Thursday 15 June 2017
ASIC Medie Release

UBS Securities Australia Limited ('UBS') has paid penalties totalling $280,000 to comply with two infringement notices given to it by the Markets 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 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 ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (the 'Competition Rules') imposes specific requirements on participants that operate crossing  systems. A participant must ensure that its crossing system deals fairly and in due turn with orders. A participant must also monitor use of its crossing system for compliance with the operating procedures of the crossing system.

UBS operates a crossing system known as UBS PIN. Orders are executed within UBS PIN using algorithms that reflect the client’s strategy. UBS has the discretion to “slice and dice” the orders and enter, amend or withdraw orders, as appropriate and as determined by its algorithms to achieve best 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 orders, irrespective of the user, are accepted by the crossing system and queued on the basis of time and price priority. UBS’ monitoring framework provided that quality assurance testing is conducted every 6 months.

The MDP has reasonable grounds to believe that UBS contravened the Competition Rules in relation to the following conduct:

a. between 1 December 2014 and 28 June 2015, UBS failed to ensure that UBS PIN dealt fairly and in due turn with orders as a result of a deficiency in the hard coded logic within UBS PIN which caused the unfilled portion of a number of partially executed orders routed to UBS PIN to lose time priority in circumstances where another order in relation to the same financial product with the same price parameters was resting in UBS PIN; and

b. 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 did not test for the consequences of partially filled orders and therefore fell short of a reasonable standard of monitoring compliance with the operating 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 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 – Execution venue and trading as principal
Both the ASIC Market Integrity Rules (ASX Market) 2010 (the 'ASX Rules') and ASIC 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  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’ dealings with participants. The disclosure of incorrect information reduces investors’ confidence in financial 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’ crossing systems and not on the ASX Market.

The cause of the issue was a system deficiency in UBS’ trading system known as 'Opera' in the evaluation of execution venue information sent to it by UBS’ order 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’ 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 ASIC 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 ASIC.

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 Rule 5A.2.1 between 1 August 2015 and 1 June 2016 by:

a.    transmitting a total of 78,833 orders to the order 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

b.    submitting a total of 924 trade reports to ASX and Chi-X (comprising 923 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’ 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.

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.