2

CommSec sales on 27 July 2015 are highlighted in the chart below. The larger trades tend to be associated with retail
clients as they are generally excluded from algorithmic trading. There trades need to be $500 or more in value.

The majority of trades relate to the activities of the automated algorithmic trading programs run by investment bank
brokers.

On average,
parcels of shares
worth around
$500 in value
contained 475
shares.

Clearly, the
majority of
transactions were
for parcels of
shares less than
$500 in value.

CommSec’s smaller trades on 27 July 2015 are brought more clearly into focus by using a truncated scale.

Trades less than $500 in

value are contained within
the shaded rectangle
 3

The following is a response by ASIC to a shareholder of CuDeco Limited (several years ago), who had expressed concerns
about the possible manipulative impact of small algorithmic trades that had become a dominant feature of trading.

“It is important to note that the small value transactions to which you refer in
your letter, are largely the result with algorithmic trading which often break down
larger orders to minimise market impact by trading a large number of small
orders throughout the day.
While the transactions can appear unusual when looked at in isolation, they are
not necessarily indicative of market manipulation”.
 4

The role played by the COMM selling algorithms is self-evident, beginning with the large DT trades at the open.

The trading by
CommSec was far
removed from
splitting up a large
order so as to
have minimal
impact on the
market.

As 88% of all
CommSec DT trades
were for parcels of
shares less than
$500 in value they
were clearly the
result of institutional
Pause algorithms tuned so
as to force price
The control over prices by CommSec is noted by the price rise when the
reductions.
algorithm paused after an initial take-down, a further take-down followed by
price capping trades and then a final take-down towards the close of trading.
 5

The non-genuine impact on prices by CommSec on July 27 is also evident in broker selling profiles that
compare involvements with Downtick trades to involvements with selling generally.
 6

A comparison of Downtick trades against price movements for both MACQ and COMM further
demonstrates the non-genuine nature of CommSec algorithmic trades on July 27, particularly as both
brokers sold similar volumes of shares.

Minimal price disruption by MACQ >> efficient selling

COMM’s selling was focussed on influencing prices? Manipulative selling

Selling that is focused on causing price falls or impeding price rises is completely contradictory
to genuine selling as defined by the Australian High Court in June 2013

Slump 1

A 3rd price
slump

Slump 2

Slump 3
 7

Period 1

Period 2

2
 8

Period 3

CommSec algorithms showed non-genuine selling attributes across the entire day’s trading.
They would have been influential in setting and maintaining artificial prices.
9
10
 11

Efficient Selling

CommSec (COMM) Downtick Trades

0.0
Cents
-2.0
Non-Genuine Selling
-4.0
Morgan Stanley (MSDW) DT Trades
0
Cents
-1
Efficient Selling
-2
Points of Note

 With only 4.5% of all selling, Commonwealth Securities (COMM) was responsible for 58% of all
trades that caused a fall in price.
 The average parcel size for COMM’s DT trades was just 3 shares.
 The frivolous small DT trades are clearly strategic trades that have the effect of controlling prices
rather than attempting to maximise the proceeds of sales.
 By contrast Morgan Stanley (MSDW) with 38% of all selling (8 times as much as COMM), recorded
only 7% of all trades that reduced prices.

Based on clarifications provided by the Australian High Court (Refer to the matter DPP vs JM) :
 selling that doesn’t strive to maximise the proceeds of sales is non-genuine, and also,
 non-genuine trades result in artificial prices.

The patterns of trading above and in the charts that follow illustrate how algorithms are
able to be tuned to circumvent the laws of supply and demand in setting prices.
 12

The sell trades by CommSec (COMM) across the day’s trading are highlighted in the charts below. The large
numbers of small trades are difficult to observe using a scale that covers all transactions. However by using
a truncated scale (i.e., showing trades up to 35 shares in size) these small trades can be observed.
Contrasting the transactions that caused falls in price against all sell trades shows that a large proportion of
small sell trades have impacted prices. It reveals how algorithms can be tuned to control prices.

All COMM Sell Trades by Volume – Feb 22, 2013

Volume 1800

1600

1400

1200

1000

800
The majority of COMM sell
600
trades were so small that they
400 are barely visible on the chart.

200

Truncated Scale
All COMM Sell Trades by Volume – Feb 22, 2013 (Truncated Scale)
35
Volume
30 A sub set of these small
trades caused a fall in price,
25
as shown in the chart below.
20

15

10

0
Truncated Scale
35 COMM DT Sell Trades (by Volume) – Feb 22, 2013 (Truncated Scale)
Volume
30

25
The small DT trades generated by CommSec are highly strategic.
They have the effect of controlling prices rather than attempting to
20 maximise the proceeds of sales.
15

10

0
 13

Trading volumes on February 22 were extremely light, with

135,854 shares changing hands in active trading.

A further 81,125 shares traded in auctions and after the close of

trading.

However, short sales were declared at

135,357 shares although the split between
auctions and active trading is not known.

Certainly much of the selling was likely to represent short sales.

Even so, all selling (i.e. normal selling and short selling) should
still strive to maximize the proceeds of sales.

Not force reductions in price at every

opportunity, and using frivolous trades to do so.

CommSec trading in CuDeco on 26 September 2013 is in complete contrast to the non-genuine patterns of
selling conducted on 22 February 2013. On 26 September CommSec algorithms were tuned so as to have
minimal impact on prices.

All CommSec (COMM) Sales on 26 September 2013

Thousands

63% of these trades were under 500 shares in size, many of which represented algorithmic trades.
10
The smaller COMM trades under 500 shares in size are shown separately below
5

CommSec (COMM) Sales under 500 shares

600
500
400
300
200
100
0

CommSec DT Trades on 26 September 2013

0

-1
Of the streams of sell trades by COMM (both large and small), just 7 resulted in a fall in price.

Commsec features as an efficient seller on the broker selling profile chart that follows.
 14

Broker Selling Profiles

60%
Comparisons of CommSec trading on
26 September 2013
22 February 2013 and 26 September
50% 2013 clearly show the discretionary
Manipulative selling biases by nature of algorithmic trading
MERL and JPM programs.
40% In the first instance, algorithms were
tuned to severely impact prices, and
in the second, algorithms were tuned
30%
Efficient selling by CommSec to have a negligible impact.

20%

10%

0%

% of DT Sales
% of All Selling

Non-genuine patterns of algorithmic selling were again a feature of trading by Commonwealth

Securities on 6 November 2014 as mentioned in the introduction Complaint 1B.

CuDeco Price Chart 6 November 2014

116

114

112

110

108

106

104 Extreme volatility due to the

dumping of a large retail holding.
102

Trading on November 6 witnessed extreme volatility at the opening of trade. It was associated with the disposal
of a retail holding of 167,760 shares by a CommSec operator. The circumstances of the sale were as follows.
 The order was originally placed into the market before the opening by the retail investor using his own
CommSec trading screen at home. The shares were offered at $1.10
 The investor was spooked by trading activity that took prices to artificial levels over a period of several
weeks.
 15

 After placing the order, he was contacted by a CommSec operator where the reasons for the sale were
discussed. The operator asked the client what the lowest acceptable price would be. The client wanted
to clear $1 as a minimum, but expected to do much better.
 The investor assumed that the operator would manage the sale prudently and attempt to get the best
price possible by making discreet sales throughout the course of the day.
 The investor was horrified to discover that the entire holding was dumped into the market, more or
less immediately the conversation ended.
 It was an outcome he could have managed himself but there was no way he would have sacrificed the
shares in that way.
 The disposal created a multi-year share price low before immediately recovering to exceed the $1.10
level chosen before the market opened, leaving the investor several thousand dollars out of pocket.
 The incident shows a preparedness to disadvantage a retail client, but also, a disregard for other
clients by engaging in trading that established an artificial price.
 Clients on margin would have been put into a quandary because of ‘manufactured’ trading volatility.
 Further questions regarding CommSec dealings concern the algorithmic trading programs that were
activated soon after the large holding was dumped. The algorithmic trades served to restrain prices
over the remainder of the day.

The price cap kept prices at artificially low

levels, and would have maintained
pressure on any clients subject to margin.
Trading where a large retail
holding was dumped.

Trading at the open was highly dubious, and the streams of small Downtick
trades throughout the remainder of the day are also highly suspicious.

81% of these trades averaged just $231 in value

The trades were institutional algorithmic trades that

identified with the actions of a non-genuine seller.

The market was compromised on November 6, 2014 resulting in shareholders on margin,

shareholders generally, and the Company itself, all being unfairly placed under pressure.
Unfairness issues arise because the trading that took place identifies with the creation
and maintenance of an artificial price.
16