Australian RBA-Spike Investigation Focuses on FX and CFD Platforms

A lack of liquidity distorted the execution logic in the algorithms of some systems giving trades a more pronounced impact

The Australian Securities and Investments Commission (ASIC) has today provided an update on its investigation into the movements in the Australian dollar shortly before the Reserve Bank of Australia (RBA)’s monetary policy decisions for February, March and April 2015. The enquiry is investigating trading in the dollar in the minute prior to the RBA’s interest rate decision statement.

The financial watchdog says it has already made extensive enquiries into the management of the information flow regarding the RBA’s interest rate decision prior to the announcement of this decision. Its current focus is on reviewing the trading behaviour of a number of foreign exchange markets and platforms including interest rate futures markets and CFD platforms providing foreign exchange markets.

It was additionally revealed that, in order to review the behavior of the futures, FX and CFD brokers, notices to produce trading information have been sent by ASIC to many financial institutions and platform providers to understand the basis of the trading on these markets at the point in time of interest.

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The enquiries are still ongoing as to the cause of the swings in the currency markets. However, preliminary findings reveal moves in the Australian Dollar ahead of the announcement to be as a result of normal market operations in an environment of lower liquidity immediately ahead of the RBA announcement. The reduction in liquidity providers is a usual occurrence prior to announcement in all markets. Much of the trading reviewed by ASIC to date was linked to position unwinds by automated trading accounts linked to risk management logic and not misconduct.

In particular, ASIC says it has observed liquidity being withdrawn from the market at the same moment as participants already positioned were considering their risk exposure too large ahead of the announcement and reducing their position. This lack of liquidity distorted the execution logic in the algorithms of some participant systems. This, along with a fall in trading volumes leading up to the release of key market data, means trades may have had a more pronounced impact on the price than they otherwise would.

Commissioner Cathie Armour said, “The Australian Dollar being ranked the fourth most traded currency pair traded by turnover must be seen to be fair, orderly and transparent. ASIC has as a priority to promote confident and informed participation by investors and consumers in the financial system. This is achieved through our role in market supervision and competition, and corporate governance. We have a strong regulatory framework that will enforce and give effect to the law if we find issues regarding confidential information or manipulative trading in any market that affects Australia’s well-being.”

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