Instinet cops fine over high-speed trades

A high-frequency trader was allowed to make hundreds of highly suspect trades for three weeks in late 2010, and the broker that facilitated those trades has now been fined $130,000.

But the corporate regulator will not say who the high-frequency trader was, if it is still operating here, or if it will be facing disciplinary action.

The Australian Securities and Investments Commission has fined Instinet Australia - an agency-only institutional broker - for allowing one of its high-speed trading clients to issue hundreds of "wash trades" to the market in late 2010 without stopping those trades or alerting authorities to them.

"Wash trading" is a form of stock manipulation in which an investor simultaneously buys and sells the same shares to artificially increase trading volume and the share price.

The stocks traded - from late October to late November 2010 - were Kingsgate Consolidated, Dominion Mining and SPDR S&P/ASX200 Fund. ASIC says Instinet was aware that it did not have an appropriate filter on its automated processing system to accommodate high-speed traders.

It also did not act on computer alerts that the suspect trades were being made by its HFT client, nor did it enter those alerts into its compliance register. The high-speed client used Instinet's processing system to make hundreds of crossings ranging in value from $2.97 to $215,696.30.

ASIC's markets disciplinary tribunal has called Instinet's behaviour "careless and irresponsible" that constituted an "unacceptable serious lack of judgment".

"As a high frequency trader and given its specific trading strategy, the client represented an increased risk of transacting accidental crossings in the market," the ASIC report says.

"In all the circumstances of the matter, Instinet's misconduct was careless and irresponsible in the context of its regulatory obligations," it says.

The fine comes after ASIC released a report in March that found no evidence of widespread manipulation of Australia's sharemarket, despite the belief by brokers and fund managers that the market was being gamed by high-frequency traders.

Instinet Australia is an agency-only institutional broker that places orders on on behalf of institutional clients.

It has no "proprietary" trading desk, meaning Instinet only trades on behalf of a client: it does not makes trades of its own with its own money.

It began operating in Australia in 2010. It had no recorded history of non-compliance with the market integrity rules or ASX Market Rules before this incident.

Global investment banks with local subsidiaries - such as JP Morgan, Morgan Stanley, Goldman Sachs and Credit Suisse - all have "proprietary trading" desks which trade stocks on the banks' behalf with the bank's own money.