Practice Note 5.12.9 Processes for Review of Orders and Trades
Rule 5.12.9 states that a Trading Member must have in place processes to review orders and trades for the purpose of detecting suspicious trading behaviour.
2. Guidance on processes
Trading Members should adopt processes to place suspicious orders and trades on exception reports or to trigger automated alerts for review. Exception reports and alerts should be reviewed by an independent party like a compliance officer or other appropriately qualified person on a regular basis to detect orders and trades or patterns of orders and trades that give rise to the possibility of non-compliance with the Rules and regulations. The review process may involve further enquiry with Trading Representative and/or customers or reviewing other Trading Representative or customer-related information such as past trading activity.
Trading Members are expected to follow up on suspicious orders and trades and keep on file the result of their review process. Where it has been established that has been non-compliance with the Rules and Regulations, or if there is any doubt as to its compliance, apart from reporting such activity to SGX-ST pursuant to Rule 5.12.8, Trading Members are expected to take appropriate action, such as advising the Trading Representative or customer to refrain from such activity, performing a closer monitoring of the Trading Representative or customer and ultimately to close the account carried on the books of the Trading Member if the suspicious activity persists. Trading Members should note that the mere fact that an order has been placed on an exception report does not absolve them from their underlying compliance responsibilities.
3 Parameters to assist in detecting suspicious trading behaviour
The effectiveness of processes to identify suspicious trading behaviour depends to a large extent on the types and size of the parameters set. A list of suggested parameters is below:(a) To detect orders/trades that are inconsistent with recent trading (not justified by assets, earnings, income yield or prospects) in the security or that would materially alter the market, such as:(i) orders/trades more than x% or a number of price steps from the previous bid/offer/last traded or closing price;(ii) several orders usually for small quantities placed close together at increasing or decreasing prices to create 'layering' of buy/sell orders in the market. Such orders may have a material impact on price but could potentially avoid detection by filters designed to pick up large one-time moves in price as the layering of orders results in many small price moves;(iii) the excessive use of Force Key in entering orders. This may be indicative of a Trading Representative and/or customer or a group of Trading Representatives and/or customers working to move the price far beyond the current price; and/or(iv) orders entered during pre-opening and pre-close at such a quantity and price that have the effect of creating a false or misleading appearance of the market for, or the price of, such securities.(b) Orders/trades that result in no change in beneficial ownership of a security or that create a false or misleading appearance of active trading, for example:(i) orders/trades arising from orders placed on both the buy and sell side of the market at a similar price and time by the same Trading Representative or customer or by a group of Trading Representatives and/or customers acting in concert.
Trading Members' processes should be able to identify the above irregular orders/trades regardless of whether they originate from one Trading Representative or customer or a group of Trading Representatives and/or customers acting in concert. In addition, they should also be able to identify consistent patterns of irregular trades done over a period of time.
In setting the above parameters, Trading Members should take note of securities that are illiquid or those with small free floats which make them susceptible to cornering and price manipulation.
Trading Members should also pay attention to orders entered after a corporate action to ensure that the orders reflect the change in price and/or quantity after the corporate action. This is to prevent securities being traded at dramatically wrong prices/quantities due to a lack of knowledge or a misunderstanding of the corporate action by uninformed customers.