Probe of Aussie Moves Before RBA Finds No Sign of Misconduct

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Australia’s securities regulator said it found no evidence of misconduct as it investigates movements in the local dollar prior to recent Reserve Bank decisions.

Preliminary findings showed the Aussie moved as a result of “normal market operations in an environment of lower liquidity immediately ahead of the RBA announcement,” the Australian Securities and Investments Commission said in a statement. “Much of the trading reviewed to date was linked to position unwinds by automated trading accounts linked to risk management logic and not misconduct.”

The currency rose or fell at least 0.6 percent before each of this year’s three monetary policy announcements -- and every time the market correctly anticipated the exchange-rate impact of the Reserve Bank of Australia’s decision. The increase in the use of high-frequency trading has spurred concern that algorithm-driven orders can lead to distortions for stock, bond and equity markets around major data releases.

“The announcement seems to indicate it was position reduction rather than position initiation that drove” the moves, Sean Keane, an Auckland-based analyst at Triple T Consulting, said by phone. “That would suggest that, rather than someone making money out of those immediate moves, all they’ve done is reduced their loss. That’s a little bit of a positive in that somebody isn’t trading on fresh information and putting in orders that are giving them an immediate gain.”

The probe is ongoing and ASIC is awaiting further information from market participants.

Swaps traders see about an 80 percent chance the RBA will cut the overnight cash-rate target to a record 2 percent at Tuesday’s meeting.

Automated Trading

“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,” Cathie Armour, a commissioner at ASIC, said in the release.

The regulator has asked many financial institutions and platform providers for trading information.

It “has observed liquidity being withdrawn from the market at the same moment as participants already positioned were considering their risk exposure too large ahead of the announcement and reducing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,” according to the ASIC statement. “This lack of liquidity distorted the execution logic in the algorithms of some participant systems.”

The RBA said April 21 in minutes from this month’s policy meeting that the currency moves may prompt further reductions in foreign-exchange market liquidity in the lead-up to its interest-rate decisions.

“It may be that the people that are involved in this hadn’t traded Australia before and weren’t aware of the liquidity constraints” at the time of RBA statement releases, said Triple T’s Keane. “That could be a factor. It’s pretty poor risk management if you’re doing that in the 90 seconds before a release.”