The corporate watchdog says new rules governing the reporting of suspicious trading activity and other matters will bring the Australian share market into line with its overseas counterparts.
The Australian Securities and Investments Commission (ASIC) said on Monday that it had set new rules for suspicious activity reporting and short sale tagging requirements which will apply to the Australian Securities Exchange (ASX) and Chi-X markets.
From November 1, 2012, market participants will be required to notify ASIC when they become aware of certain suspicious trading activity.
The short sale tagging obligation starting from March 1, 2014, will require market participants to specify, at the time that an order is placed, the quantity of a sell order that is a short sale.
ASIC's senior executive leader of market and participant supervision, Greg Yanco, said the suspicious trading obligation would generate a greater number of reports of potential misconduct.
Also, reports would be received at an earlier stage, which would assist in earlier identification of potential misconduct.
"Experiences from regulators in comparable jurisdictions like the UK, Europe, Canada and the US suggest that supervision of insider trading and market manipulation is greatly enhanced by a robust suspicious activity reporting regime," Mr Yanco said.
The new requirements regarding short sale tagging were prompted by experience during the global financial crisis.
Short selling is where a person enters into an agreement to sell a security that the person does not currently own.
Short sellers need to make arrangements to cover their delivery obligations to the buyer before they fall due.
The most common reason for short selling is that an investor believes the security is overvalued and its price is likely to fall in the future.
Short selling the security will allow the investor to profit from the fall.
ASIC says the effective and timely disclosure of short selling can indicate the level of short selling in particular stocks, explain certain share price movements, and provides an early signal that individual securities may be overvalued.
It also indicates that a proportion of the sales in an individual security will need to be reversed by new purchases to cover the short seller's settlement obligations.
During the global financial crisis, uncertainty surrounding the actual level of short selling activity in Australian securities compounded the direct impact of short selling because it was resulting in rumour and speculation in the marketplace.
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