Surging Stocks at Australia’s Open Prompt Regulatory Inquiry

Trades in about a dozen Australian equities including Australia & New Zealand Banking Group Ltd. (ANZ) and AMP Ltd. surged at the open in the absence of company news, prompting inquiries by the market regulator.

ANZ, which closed yesterday at A$25.96, opened 6.4 percent higher when 836,205 shares changed hands in 349 trades, all at the ask price of A$27.63, according to data compiled by Bloomberg. The stock fell back to A$26.13 within a minute and closed at A$25.96. Insurer AMP jumped 4.5 percent at the open while Brambles Ltd. (BXB) surged 7.6 percent.

The incident comes 2 1/2 months after Knight Capital Group Inc. (KGC), one of the biggest market makers in U.S. stocks, bombarded American exchanges with mistaken orders in the first minutes of trading on Aug. 1. The company blamed the mishap on defective software. Two weeks ago, orders for Indian stocks improperly entered by a Mumbai brokerage sent the S&P CNF Nifty Index down 16 percent over eight seconds before it rebounded.

“It’s unlikely that someone was consciously manipulating prices but it could easily be that something’s gone wrong,” said Angus Gluskie, managing director at White Funds Management in Sydney who manages more than $350 million. “There’s a greater chance of something like that happening today because it was an options expiry day. It was very unusual and we’d also like to know why it happened.”

The Australian Securities and Investment Commission has commenced informal inquiries into the incident, Andre Khoury, a Sydney-based spokesman for ASIC said in a statement. There haven’t been any requests to cancel trades, Matthew Gibbs, Sydney-based spokesman for ASX Ltd. (ASX), operator of the country’s main bourse, said by telephone.

First Phase

“Today was the expiry day for the October ASX 200 Index futures contracts, which often generates heightened trading activity as investors seek to unwind their positions,” Gibbs, said by e-mail.“ASX alerted ASIC this morning and has been closely monitoring trading throughout the day, which has been orderly.”

The stocks that moved unusually today were mainly those attached to companies whose tickers begin with the letters A and B. Australia’s market opens in phases according to the alphabetical order of tickers, ASX said.

“The settlement price of the futures contract is effectively at the opening price and it’s not unusual for traders seeking to unwind arbitrage positions to do that at the open,” Alex Frino, chief executive officer of the Capital Markets Co-operative Research Centre in Sydney said in a telephone interview of the futures expiry date. “When arbitragers construct portfolios, they typically don’t use all of the stocks in the ASX200, they use a proxy portfolio.”

AGL, AMP

AGL Energy Ltd. (AGK), which closed yesterday at A$14.84, opened 4.3 percent higher when 177,416 shares changed hands in 107 trades at the price of A$15.84. It has traded at an average price of $14.95 since five minutes after the open.

AMP Ltd. (AMP) opened 4.5 percent higher when 1.1 million shares were exchanged in 157 trades at A$4.85. The stock has since traded at an average price of A$4.70, data compiled by Bloomberg show.

Brambles Ltd., a supplier of shipping pallets, jumped 7.5 percent to A$7.69 straight after the open before falling to A$7.38 within the first minute of trade. It was at A$7.305 at 1:45 p.m. in Sydney. The first trades of the day were crossed from two off-exchange transactions for a total of 50,000 shares at A$7.65, according to data compiled by Bloomberg.

ASIC Investigating

“ASIC is aware of a surge in the share price of a number of major ASX 200 stocks this morning and, in line with its normal practice, is looking into the matter and has commenced enquiries with the market participants involved in trading in these stocks and related derivatives,” Khoury said. “This is not a formal investigation.”

Regulators around the world are scrutinizing market structure and electronic trading after a series of malfunctions. In May 2010, a broker’s algorithm set in motion events now known as the flash crash, which briefly wiped $862 billion from U.S. stocks. The Nasdaq Stock Market in May this year was overwhelmed by order cancellations and trade confirmations were delayed on the first day of trading in Facebook Inc., the largest initial public offering of 2012.

Financial Hub

Australia is trying to increase its presence as a financial hub by opening up the equity market, allowing Chi-X Australia Pty from last year to compete as an alternative stock venue.

ASX in November last year began using a platform catering to high-frequency traders called PureMatch, part of efforts to counter competition from Chi-X. It described the platform as a “high-speed, low latency order book” for the most liquid shares and exchange traded funds.

Australian regulators are considering requiring all trading algorithms to have an inbuilt “kill switch” to immediately disable them if they malfunction, ASIC Chairman Greg Medcraft told a conference in Sydney Oct. 10.

“There’s certainly been some strange moves,” said Chris Weston, a Melbourne-based trader at IG Markets Ltd. “We don’t yet know much about what the issue was.”

To contact the reporters on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net; Eleni Himaras in Hong Kong at ehimaras@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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