How a high-frequency trader may get out of a fine
Updated December 30, 2019 08:57:20Australia’s Securities and Investment Commission (SAC) says it is investigating high-speed trading firm Sierra Trading Post for insider trading in the $1.7 billion high-risk credit default swap (HFS), a derivative that has sparked a national debate about insider trading.
Key points:Sierra Trading Post says it has “serious concerns” about the trading of the HFS, which it says is a “fraud”The firm says it will defend itself against the allegationsThe regulator said in a statement on Monday that it has issued a “serious concern” to Sierra Trading post that “it has serious concerns about the potential trading of HFS” and that “sources have told us that Sierra Trading has serious suspicions about the trades”.
Sierra is “strongly considering its options” to take legal action against the firm, it said.
The company is “deeply concerned” about its “cooperation” with SAC, it added.
“We are working closely with SACT, the regulator, and are confident that we can defend ourselves,” it said in the statement.”SAC has no power to stop us trading or to prevent us from doing so, and we will defend ourselves vigorously against this allegation.”
The HFS has been in the spotlight since it was first linked to the 2008 financial crisis.
The Hfs is one of the world’s biggest derivatives contracts, with more than $500 trillion in assets.
The value of the contracts fluctuates with the global financial system.
Sierra’s trading was described as a “flaw” in a note by the Australian Securities and Investments Commission (ASIC), which was launched in November.
The regulator has called on both the Hfs and the trading firm to cooperate with the investigation.
“In the light of the ongoing investigation, it is important that both the trading and the company cooperate fully and effectively,” ASIC’s chief executive officer John Kelly said in an email to Fairfax Media.
“It is important for both parties that the inquiry is thorough and that the full extent of the allegations are properly investigated.”SAC said it had “serious reservations” about Sierra Trading’s trading and had asked the company to provide all information it could.
“The company has had some significant internal discussions with its traders about its HFS trading strategy and concerns have been raised about its trading strategy,” ASIC said.
“Our view is that it is a fraud that is not supported by the evidence and that it may have breached the ASXA rules and the Financial Services Compensation Act.”
Sierra said it was confident the company would be vindicated.
“While Sierra Trading does not comment on the accuracy of the material it receives, the company has confirmed that it believes that it was in breach of the ASIC rules,” the company said in its statement.
The SEC has also launched a separate inquiry into the HfS.
The agency is investigating whether Sierra Trading and Sierra Trading posted misleading trading statements in a way that led to the “significant financial loss” of Sierra Trading.
The regulatory body said in that investigation it had also “serious doubts” about what Sierra Trading had said about its own trading.
“Investigations will be conducted by ASIC’s team of senior enforcement and compliance experts to identify the nature of the breach, whether the breach involved any trading or other misconduct and how the breach was committed,” it added in a blog post.SAC is also investigating whether the HftS is a breach of ASX rules because the trading was conducted on an HFS.
It said the regulator was looking into whether Sierra trading “inadvertently” failed to properly disclose a trade involving the HafS.
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