ASX TRADING ISSUES

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Research Paper 2

Background Information Regarding a

Substantially Broken ASX Market
Re: Non-Genuine Trading and Artificial Prices

Published June 2015

Copyright 2015

DISCLAIMER: All information presented as research has been sourced from broker
trading records, registry records and public media. While the author considers the
data to be accurate and free from transcription errors, no guarantees can be given
regarding conclusions and/or commentary provided. Interested readers 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.

Broken Markets 1 Introduction

The title Broken Markets refers to the advent of technology and radical changes in the
way markets operate, whereby stock exchanges around the globe are now run by
private equity firms with profits distributed to their shareholders.
The changes have meant that markets are dominated by traders with a gaming and
wealth stripping mentality. The style of trading involves high levels of back and forth
non-genuine trading churn. As a result, markets are severely limited in being able to
adequately perform the roles they were originally designed for.
And those roles consisted of:
providing a fair medium for the buying and selling of securities; and
providing a system for the efficient allocation of capital.
Markets were meant to foster productive enterprise and underpin national economies,
not pander to minority interests focussed on gaming the investments of others, but
with no commitment to the markets themselves. Many traders aim to start and end
each day with no stock positions held. Predatory trading offers zero support for the
market and provides zero public benefit.
It needs to be kept in mind that trading that adds minimal value to the economy and
zero public benefit earns revenues from turnover which benefits its shareholders.

The instruments of wealth stripping are algorithmic trading and short selling; systems
that enjoy legal status but are nevertheless able to be abused to engage in market
manipulation.
Market manipulation is represented by the artificial prices that come about through
algorithms being allowed to conduct large numbers of trades that identify with nongenuine buying and selling.
It is illegal to create an artificial price, yet little or no action has been taken to address
the situation.
The contradiction means that highly sophisticated forms of trading that identifies with
white collar fraud is being sanctioned in trading that takes place on the ASX

POINTS TO CONSIDER
The share market largely functions as a casino where bets on the potential for price
movements have become a major focus of predatory traders, regardless of company
fundamentals, and it is algorithms that manage prices to ensure winning bets.
Under-valuations are unfairly imposed on quality companies prior to cheap bids
and it leads to dilution of existing holders and loss of control and even loss of
control over Australian companies and sovereign assets.
Profit from fraudulent activity comes at the expense of genuine investors as trading
is a zero sum game. Personal investments including those of self-funded retirees,
are at risk and so too are the investments of Australian workers that make up the
national superannuation pool;
Compulsory superannuation contributions are being channelled into a market
where price rigging, because of non-genuine trading, runs at extremely high levels;
White collar fraud in the share market through non-genuine trading represents an
enormous drain on Australian companies, the economy and government revenues;
Predatory trading has restricted the market in being able to support the national
economy through the efficient allocation of capital. Instead the market facilitates
wealth stripping with Australian wealth inexorably flowing out of the country;
The short selling of companies without cash flow, attempting to establish
sustainable businesses that will benefit Australians and the economy is detrimental
to the national interest yet it is blithely tolerated. And that is mainly because if ASIC
provides exemptions for one company there would be a flood of companies seeking
relief.
Such arguments completely ignore the abuses that take place with short selling
(Refer to the research on short selling) and the perilous trading environment all
companies have to endure for zero public benefit;
Market irregularities occur under the pretext of fair, orderly and transparent
markets which means that Australians with exposure to the share market are mostly
oblivious to what is being allowed to take place;
Markets that are fair, orderly and well regulated, do not tolerate non-genuine
buying and selling activities that result in artificial adjustments to prices, thereby
making the term sanctioned price rigging an apt description for what takes place
on the ASX.

THE IMPACT OF WEALTH STRIPPING

Forced under-valuations lead to the dilution of existing shareholders and reduced levels
of control over company affairs. It occurs when capital has to be raised at cheap prices.
Undervaluations imposed on quality Australian companies almost always results in
control, if not outright ownership, moving into the hands of offshore entities.

There is the ongoing fall out in terms of hits to regional economies with industry
consolidations and job losses, falls in government tax receipts and state royalties.

Trading that strips wealth from the market has a twofold impact on government
resources.
The collect from taxation is reduced because:
investors are forced into making losses or reduced profits, and
the sophisticated entities that benefit are often able to minimize their tax
using off-shore arrangements.
There are increasing requests fro government assistance because of failed
personal investments and reduced income, especially by self funded retirees
and those forced out of work.

The wealth stripping that accompanies non-genuine trading translates into financial
hardship and reduced living standards for ordinary Australians.
That is because of:
inevitable cost saving measures such as reducing benefits and services, and
inevitable increases in interest rates and taxes over the longer term

The Official View Regarding Market Manipulation

A Statement from Treasury Statement Regarding Artificial Prices
Any deliberate attempt to force a security's price to an artificial level is illegal,
irrespective of the methods employed.
ASIC continuously monitors market activity in real time for suspicious trading
patterns that could indicate market misconduct. Where such patterns are observed
or if matters are referred to them, ASIC has a broad range of powers of
investigation at its disposal.
If the activity is determined to constitute market abuse, ASIC is able to pursue
appropriate sanctions.

The treasury statement clearly puts full faith in the ability of ASIC to regulate the share
market, however, as revealed by the recent Senate Inquiry into ASIC, the organization
itself is enormously discredited.

Given the reliance by government on ASIC to regulate the share market,

the questions that remain are Who regulates the regulator? and
Who gets to address issues that ASIC fail to deal with?

The recommendation by the Senate Inquiry held into ASICs Operations

regarding fraudulent behaviour associated with the Commonwealth
Bank, was for a Royal Commission to get to the bottom of fraud and
dubious lending practices in the banking industry; a recommendation
that was subsequently dismissed by the current government.

The Senate recommendation needs to be re-visited, and share

market issues also need to be included as a matter of urgency.

The Need for Transparency and Public Awareness

The issues raised by research into long term empirical trading data have far reaching
implications for all Australians with exposure to the share market.
Distortions to the market are the result of non-genuine algorithmic trading interactions.
Widespread anomalies in trading data confirm that the creation of artificial prices is a very large
part of what algorithms accomplish.
The irregularities that arise from algorithmic trading have been brought to the attention of
authorities over several years.
In particular the issues have repeatedly been raised with:
The Australian Securities and Investment Commission (ASIC)
The Senate Inquiry into ASIC Operations
The Financial Services Inquiry
The Parliamentary Joint Committee on Corporations and Financial Services
Various Politicians
ASIC has responded by simply stating that they dont have a problem with the issues.
However, ASIC has not been able to provide clarifications, only a stonewalling approach
where they claim they cannot comment on operational matters.
The response in no way satisfies obvious concerns and conflicts with the Corporations
Act which proclaims that it is illegal to set and maintain artificial prices.
The issues are real and they are intimately associated with billions of dollars being unfairly removed from the
market capitalizations of companies across the ASX, and it takes place annually.
And the unfair loss of wealth has a crippling effect on the operational well-being of the companies that have
been targeted, as well as limiting the spending power of shareholders, which then impacts the broader
economy.
The Australian economy is already under duress as evidenced by the difficulties being experienced by the
current Government in being able to get the budget back into surplus.
Continued wealth stripping will ultimately mean that Australia will be reduced to the status of struggling
economies in Europe such as Greece and Italy where Bail-In provisions (the seizing of peoples wealth in bank
accounts) is being used to bolster failing economies.
Following the GFC, Bail-Outs given to the Too Big to Fail banks by the US Federal Reserve, and initiatives
promoted by countries such as Australia, in handing out cash to promote confidence and encourage
spending, were always going to be short term fixes.
Problems caused by unsustainable levels of debt were never going to be fixed through creating extra debt.
Bai-In provisions are very much in place in countries such as Spain, Italy, Canada, Greece, Cyprus and even
New Zealand in preparation for the next GFC event.
They are being pushed by the G20 and are being considered for Australia.
No more Bail-Out money is available as the system is tapped out, so Bail-Ins will have an enormous impact
on ordinary citizens. They are the ones who will carry the debt burdens generated by the large banks.

The Need for Transparency and Public Awareness contd

The response by politicians, Government Inquiries, the Parliamentary Joint Committee on
Corporations and Financial services, and even the Financial Ombudsman, are all identical.
They simply defer to ASIC, as ASIC are the ultimate authority on regulatory matters.
Research has also brought to attention the economic theory of regulatory capture, where
regulatory agencies tend towards looking after the interests of those being regulated ahead of
those who are vulnerable and need to be protected.
By not addressing the non-genuine trading associated with the use of algorithms, the
watchdog, for whatever reason, is not doing the task that has been entrusted to it. Yet the
trading enables wealth to be continuously siphoned out of the Australian economy.
Research clearly shows that issues concerning the creation and maintenance of artificial prices
are being ignored and it is costing Australians dearly. Share market fraud, when combined with
offshore tax minimization practices and banking fraud, pose a toxic threat to the financial
security of the nation.
Allowing non-genuine trading to generate artificial prices is
tantamount to sanctioned white collar fraud, and not only that,
the situation is enormously detrimental to the national interest.

Politicians of all persuasions are encouraged to gain an appreciation

of the issues for themselves, as relying on the regulators advice has
meant that systemic problems have been allowed to persist for a very
long period of time.

Transparency and public awareness will provide an opportunity to bring the matters that
are taking place on ASICs watch to the attention of the full parliament where bi-partisan
politics should not play a role in addressing issues concerning white collar fraud.
And put simply, those matters involve the financial markets being purposefully
engineered so that sophisticated entities can continuously strip wealth from the system,
and they are able to do so virtually with impunity.

The Issue of Who Regulates the Regulator.

While the police force has a unit that monitors and investigates its own enforcement
officers, no such system applies to the regulation of the financial markets.
The regulator is actually a proponent of self-regulation and self-regulation doesnt
work because of vested interests.
The ASX clearly failed as a self-regulator in events preceding and following the GFC
and was replaced by ASIC.
Soft regulation, as continually provided by ASIC in reaching agreement with wrong
doers regarding slap-on-the-wrist enforceable undertakings, compounds the
problems, as soft penalties become considered as just the cost of doing business.
Breaking the rules and paying the price, if necessary still proves to be a robust
business model as evidenced in Australian banking fraud and in global markets
Clearly, with no effective system in place to ensure that the regulator does the job
required of it, the Australian Financial System is extremely vulnerable. If the
regulator isnt able to identify the problems, or is aware of them but chooses not to
act, then Treasury and the nation are misinformed.
And unfortunately, ASIC has a track record for being ineffective as revealed by the
recent Senate Inquiry and whistle blowers being ignored until media vigilance finally
elicited a response.
The nation requires a standard of regulation that actively prevents white collar fraud,
in all its forms, as it is ordinary Australians who ultimately wear the costs.

Recommendation
Trends in long term market data show that algorithms are able to be tuned so as to
generate artificial prices. The activities are a pervasive feature of trading on the ASX.
ASIC, by tacitly accepting non-genuine trading behaviours is exposing Australians to a
situation that equates to sanctioned white collar fraud.
Malfeasance concerning the share market runs to the tune of many billions of dollars
and therefore dwarfs that associated with banking fraud.

The matters highlight the need for a Royal Commission into

Australias Financial System.
One was already recommended by the recent Senate Inquiry into
ASICs Operations but was dismissed.
It is recommended that a Royal Commission is put in place as
share market issues are many multiples larger than the banking
fraud that has taken place.

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