bots, page-17

That was me that rang your money your call, there should be a link to it on their website...it was on the Tuesday night, Julia Lee was the host.

This is what ASX's response was to me about the BCI bot manipulation and the cancelled crossing seconds later at a $2.00 premium to the opening trade, also sent it to big bad ferocious ASIC, and sent the response to quite a few journalists, and it got PLENTY of press and TV coverage. I eagerly await the day these "regulators" face a Royal Commission explaining why they totally failed to enforce the corporations act, i want to see them squirm in their seats like the LIBOR boys when they were forced to testify in the UK.

Dear Botkiller,

RE: BC Iron Limited (BCI)

Thank you for your email dated 21 August 2012 in which you raised concerns of manipulation in BCI on 20 August. The email also raised the issue of the whole market being riddled with fraud. I presume that by "fraud" you are referring to the use of algorithmic trading and High Frequency Trading (HFT).

I will address the trading which occurred in BCI on 20 August and then follow with an explanation about HFT.

We have reviewed the trading in BCI on 20 August. The trading was unusual and appears to have been caused by a broker entering a bid with an erroneous price. At about 11:20, a broker entered a bid for 79,164 BCI at a price of $3.50. This price was 32% higher than the last sale. The order resulted in trades at prices up to $3.50. Immediately following the trade, a crossing was executed at $4.64. According to ASX Cancellation policy, the reference price for BCI was $2.64, i.e. the opening price and this meant that any trades greater than 50% above the reference price were in the Error Cancellation Range. ASX released a market announcement that the trades were under review. Subsequently, ASX cancelled the crossing trade at $4.64 but all the other trades were allowed to stand. It appears that the unusual trading was a result of an error made by a broker. The above trading and actions taken by ASX were in accordance with the ASX Operating Rules and Procedures.

The use of high speed algorithmic trading, sometimes referred to as High Frequency Trading (HFT), is increasing in securities markets around the globe driven by the advancement of technology and the fragmentation of equity markets following the introduction of securities exchange competition.

Industry feedback suggests that HFT may already account for 15–25% of equity market turnover in Australia, up from 3–4% estimated by industry in February 2010. We also believe that overall market turnover generated by algorithms is close to 50%. In overseas markets such as the USA these percentages are even higher.

ASX and market integrity

The terms „algorithmic trading? and „high frequency trading? are generic terms that describe a wide range of trading strategies and systems. It is important to stress they do not all pose a risk to market integrity. Nevertheless, ASX has regard for the potential risks that a significant

growth in algorithmic trading may create, particularly when combined with a reduction in liquidity in the main („lit?) market that ASX runs for the benefit of all investors.

As a market operator, ASX is subject to obligations under the Corporations Act and Market Integrity Rules. For example, ASX is required to have Operating Rules which serve as controls for orders entered in error as well as having a trade cancellation policy aimed at limiting extreme price movements. Currently an order threshold of a 10% price movement applies to stocks available for trading on more than one market (i.e. ASX and Chi-X) and this threshold will apply to all stocks by the end of 2012. The trade cancellation policy applies to all stocks and other products listed on ASX.

As part of our market monitoring activities, if ASX observes activities that may impact market integrity, we make referrals to Australian Securities and Investments Commission (ASIC), which is the regulatory agency that now has the role of real time market surveillance.

ASIC and the Market Integrity Rule Framework

ASIC monitors HFT and algorithmic trading activity as part of its surveillance function. ASIC has made it clear that under the Market Integrity Rules there are currently a number of controls to mitigate the risks associated with electronic trading and HFT including:

? Participants are required to have controls to manage the entry of orders into the market, Access without such controls is prohibited under the Market Integrity Rules;

? Operators such as ASX are required to have order entry controls and trade cancellation policies to prevent extreme order entry errors. These are included in the ASX Operating Rules;

? Naked short selling is prohibited, except for limited circumstances; and,

? ASIC has emergency rule making powers and can act quickly if its sees developments that pose an immediate risk to market integrity or client interests.

ASIC has recognised that these basic controls can be further strengthened in light of recent market developments. For example, ASIC has identified problematic algorithms as an issue and is working with brokers and their clients to reduce the risk of algorithms having a negative impact on market integrity.

ASIC has also indicated in a recent consultation paper (entitled CP 179) that it intends to review the following matters relating to HFT and algorithmic trading:

? Continuing to analyse the prevalence and impact of dark pools and high-frequency trading in the Australian market and abroad; and

? Reviewing the nature of trading by high-frequency traders, including impacts on orderliness of trading in dark pools and on markets, and possible misconduct.

It is expected that ASIC will report on its findings, including any regulatory response it sees necessary, in the fourth quarter of 2012. ASX has, and will continue to be, an active contributor to that consultation process. ASX ultimately does not make the rules that govern algorithmic

trading and HFT but we are putting forward clear recommendations on how Australia can ensure that its financial markets retain their traditional strengths.

ASX functions primarily as a market operator, clearing house and settlement system facilitator. ASIC is the regulatory body responsible for monitoring and enforcing compliance of the Corporations Act and the Market Integrity Rules. The Market Integrity Rules cover matters such as market manipulation, insider trading and other forms of market abuse. Investors are able to submit complaints to ASIC about incidents which raise suspicion of market abuse via its web site.

Given ASIC's role, we will be providing information to ASIC regarding algorithmic trading and HFT complaints, however you may also wish to raise your concerns directly with the regulator.

Thank you again for bringing your concerns to our attention.

Yours sincerely,

Kam Chand

Manager, Surveillance

ASX Compliance Pty Ltd