1. What is online securities trading?

Shares and other financial products or securities (eg bonds, foreign exchange and managed investment funds) (Securities) may be exchanged or traded online using the internet (Exchanges). The internet helps drive down transaction costs, facilitate cross-border transactions and avoid the need to conduct trades using intermediaries.

2. Securities regulatory bodies

The Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange (ASX) regulate securities in Australia. Both bodies seek to find an ideal balance between efficiency and fairness in securities markets.

ASIC regulates the securities market by applying the securities provisions of the Corporations Act 2001 (to be replaced by the Financial Services Reform Bill discussed below). All market participants must comply with the Corporations Act 2001. The ASX regulates securities using the ASX Listing Rules and ASX Business Rules (Rules). The Business Rules apply to member-brokers and the Listing Rules apply to listed companies. The Rules are only contractually binding on the market participants.

ASIC regulates the behaviour of all market participants, provides investor protection and oversees the ASX exchange The ASX regulates the structural and operational efficiency of its own market and the behaviour of its member-brokers and listed companies by contractual means.

The ASX, ASIC or an aggrieved person can apply to the court to enforce compliance by a market participant with the Rules or to force the ASX to enforce their own Rules.(1) Breach of the court order may attract criminal sanctions. This gives the Rules a quasi-statutory status.

3. Stock market licence

The establishment and operation of an online securities exchange requires a stock market licence under the Corporations Act 2001 .

ASIC considers the following factors when considering an application for a licence:

(a) the regulation of intermediaries;

(b) ensuring the adequacy, accuracy and availability of market information;

(c) support of an orderly and fair trading system;

(d) ensuring a speedy, economical and certain clearing and settlement system;

(e) the solvency of the market provider; and

(f) adequate market supervision arrangements.

4. Securities offers on the internet

ASIC considers that the Australian securities laws may apply to offers or invitations on an internet site if that site is accessible from Australia, irrespective of where the offerer is located.

ASIC will not regulate offers, invitations or advertisements of securities that are accessible in Australia on the internet if they:

(a) are not targeted at Australians;

(b) contain a meaningful jurisdictional disclaimer;

(c) have little or no impact on Australian investors; and

(d) there is no misconduct.

5. Securities bulletin boards may need to be licensed

Bulletin boards that regularly provide information about the prices of securities may be a "stock market" requiring a licence under the Corporations Act 2001 . This may be the case even if contracts for the sale and purchase of securities are not made directly on or through the bulletin board.

If a bulletin board provides potential vendors and purchasers with a reasonable expectation that they can regularly execute orders at the prices quoted by identifying people likely to deal at the quoted prices, the bulletin board will be regulated as a stock market. Bulletin boards are more likely to fall within the Corporations Act 2001 where they facilitate the linking of buying and selling interests (eg providing information over the telephone).

6. ASX Business Rules

The stage of the trading process commencing the time a broker receives an order from a client to when it is executed in the system is known as order-routing. To prevent a conflict of interest arising between the trades of the broker as principal and as agent for a customer, the following Rules apply:(2)

(a) customer orders must be given priority to the brokers' customer orders with the exception that brokers can trade at prices that would not satisfy the order of the customer. Brokers' associates (eg family members, employees, related entities, controlling relationships, substantial shareholders) are covered by the prohibition. Brokers must keep a register of their associates.

(b) brokers (including associates) must disclose to their clients any trading done as principals;

(c) brokers must establish Chinese walls to deal with insider trading as follows:
* the broker can only trade in the share if it has no knowledge of inside information; and
* the client (if it is an agent trade) cannot be an associate of the firm.

(d) a broker must not trade as an agent if suspicious the effect of the client's order will create a false or misleading market;

(e) a broker must provide a client with a contract note of a trade done on its behalf;

(f) ASIC has the power to inspect and investigate ASX Members and any relevant individual; to publish investigatory reports; to enter premises with a warrant; and to initiate or pursue criminal proceedings;

(g) ASX Members may be subject to investigations and disciplinary proceedings ranging from fines, warnings, suspension, revocation and expulsion from the ASX Exchange.

7. Electronic prospectuses

ASIC permits the issue of electronic prospectuses provided the text-based information in the prospectus contains the same information as the paper-based prospectus. The electronic application form and prospectus can only differ from the paper versions lodged with ASIC in the following limited ways:

(a) the different technological tools available to readers of electronic as distinct from paper documents (eg hypertext links and prompts);

(b) the difference between the paper and electronic environments (eg the absence in the electronic document of graphics and other decorative material); and

(c) investor protection mechanisms (eg the electronic prospectus must warn investors from passing on to another person the application form without a complete and unaltered form of the prospectus).

ASIC permits internet hosts to act as service providers and distribute electronic prospectuses through the internet.

8. Electronic applications for securities

ASIC permits a fully electronic application process for securities subject to conditions including the prospectus is provided at the same time as the application form. ASIC has recently granted exemptions form the Corporations Act 2001 so that licensed dealers may personalise and issue application forms for securities, created either by themselves or issuers. This could allow for personalised and interactive application mechanisms.

9. Privacy issues and online trading

The Federal Privacy Commissioner has issued best practice guidelines about the collection and use of personal information and the Internet (from http://www.privacy.gov.au). While the guidelines relate to Federal and ACT government agency websites, they provide useful advice about what you should consider when sending personal information on the internet. You can get a copy.

For example, the Privacy Commissioner recommends that all agencies issue a Privacy Statement which confirms:

(a) what personal information is collected;
(b) for what purpose the information is collected;
(c) how the information is to be used;
(d) if the information is disclosed to others, who they are; and
(e) any other relevant privacy issues.

You should ask your broker what security procedures are in place to protect personal information you provide on your online application form and your instructions to the broker when you start trading over the internet.

Note: internet security cannot be guaranteed.

Various methods exist to collect information about your internet usage without your knowledge or consent. Third parties may be able to track when and how often you use an internet broking service or any other online service.

See Privacy Fact Sheet.

See consumer information about investing on the internet available from ASIC (at http://www.fido.asic.gov.au).

10. Managing risk with online securities trading

Consumers trading securities online should:(3)

(a) Find out who you are dealing with

Australian companies must be registered with ASIC. The company must provide you with information which any member of the public can look up. You can search ASIC databases (at http://www.asic.gov.au) to find:

* more information about a company (eg company name, company number, location and documents lodged with ASIC);

* if your broker is licensed to deal in securities or to provide investment advice; or

* directors who are banned from managing a company.

(b) Is there a prospectus?

Most investments (see below) are required by law to give you an Australian prospectus to look at before you buy. The prospectus must set out all the information that you and your professional advisers would need to make an informed assessment about the investment.

Check whether a prospectus is current by looking at the expiry date. This is usually on the first page or on the front cover of the prospectus. The following investments must have a prospectus:

* shares;
* property trusts;
* equity (share) trusts;
* cash management trusts;
* agricultural investment schemes (eg pine trees, ostriches, flowers, fish farming);
* film schemes (where you invest in the making of a movie); and
* timeshares.

Generally, its illegal to offer investments without a prospectus that has been approved by ASIC.

A website advertising an investment should give you details of the prospectus and the date it was lodged with ASIC. It should tell you how to get a copy. Some companies are now publishing their prospectuses electronically on the internet.

(c) Offer is not from Australia?

Many investments on the internet are offered by people based outside Australia. ASIC strongly advises you to avoid these investments. If you wish to buy overseas shares or investments you should deal only with advisers licensed to operate in Australia. If you already own overseas shares or investments, your company may be permitted to offer you new shares or extra units. Your rights as an investor will come under the law of that country.

(d) Compliance with Best Practice Model

When dealing with companies on the internet, check whether they have adopted and comply with the e-commerce best practice model. See Best Practice Model. Search for ASIC Online Trading Survey at http://www.asic.gov.au/.

(e) Is your broker licensed?

All online brokers operating in Australia must be licensed by ASIC. If your online broker also provides you with investment advice, you will be a retail investor and are entitled to the following additional protection:

* you should receive an Advisory Services Guide from the adviser informing you if they are licensed and how they deal with customer complaints; and

* you will have access to independent complaints resolution procedures if something goes wrong.

Approach trading online in an informed way. If necessary, obtain the services of a licensed professional who can give advice about the investment strategy that best suits you.

(f)Compare the online services available

Research and compare:

* brokerage and commissions for internet trading;

* the shares or other securities that can be traded through the online broker;

* any requirements about the sponsoring of shares by the broker;

* any money or other limits on trades that can be made online; and

* any costs to subscribe to information sources linked to the online broker's website.

* Carefully read and understand the terms and conditions of any agreement about how you will trade online. Speak to a professional adviser if you are concerned or unsure about what the agreement means for you.

(g) Understand what happens to your online orders

When you buy or sell shares through an online broker you may be either:

* sending an electronic order directly to a representative of the broker, who will then place your order on the market; or

* accessing the markets directly (known as straight through processing).

Most online broking services require an employee of the broker to enter your online orders into ASX's trading system (SEATS). In this case, sending the order via the internet is in some ways similar to making an order by telephone or by facsimile, you do not have real-time access to the market.

Alternatively, some brokers can offer direct access to SEATS without the need for human intervention. If you are using the services of one of these brokers, it is even more important to make sure that the order details you type-in are totally correct.

Electronic communications are not foolproof. The delivery and receipt of electronic messages can be affected by factors such as computer software or hardware errors, and localised communication problems. Delays can occur regardless of which type of broker you use. Keep this in mind when you manage your online trading.

Buying and selling shares through "traditional" offline brokers may be subject to unexpected delays which can cost you money. This might depend on the level of activity in the market at a given time and where you are placed in the queue of people buying and selling shares.

The law does not regulate the time in which a customer's order should be executed by a broker, however, it does prohibit a business from making false or misleading statements about the type of the services it offers.

Note: be aware of statements from an online broker that guarantee instantaneous execution of customer orders. This cannot be guaranteed.

(h) Use limit trading where appropriate

When sending a buy or sell order to your online broker, you can choose between sending a market order or a limit order.

Market order: is an order to buy or sell shares at the prevailing market price. When you place a market order you cannot control the price at which the order will be filled. The timing of the execution of the order may make a big difference to your bottom line particularly in a fast-moving market.

Limit order: operate only within a specified upper or lower price limit. For example, you can request a limit order to buy shares in company XYZ at a price below $1.20. If the market price quickly exceeds this limit, your order might not be filled. However, you won't be paying more for shares in company XYZ that you wanted to pay or could afford.

Note: Before trading online ensure you understand the use of limit and market orders and know the terms on which your broker will accept these orders.

(i) Understand online confirmation procedures

Monitor the progress of your online orders. Ensure you get timely confirmation from the broker that your electronic order:
* has been received;
* has been placed on the market; and
* has been filled.

You can only change or cancel an order up until the time that it is filled.

If unsure about whether your original order has been successfully received by the broker (eg you do not receive an electronic confirmation soon after the order was sent), contact the broker by telephone. Do this before you send a duplicate order to avoid the risk of inadvertently doubling-up on your original order.

Save the electronic records of your trading activity to the hard-drive on your computer for future reference.

Note: Before you start trading online, make sure you are familiar with your brokers' order confirmation procedures.


Other relevant Articles on this site:
Best practice model
Terms and conditions of website
Overseas transactions
Trade practices and consumer protection
Contract

Other relevant Fact Sheets:
Consumer Protection
Corporations and Securities Law
Electronic Payment Systems
Electronic Transactions Act
Funding Business Start-ups
Jurisdiction
Keeping Electronic Records
Online Contracts 
Privacy
Secure Electronic Transactions 

End Notes
(1) Corporations Act 2001 section 777 and section 1114.
(2) L Semaan "An International Comparison of Regulatory Regimes and Trading Structures", UTS Working Paper (February 1999).
(3) Based on material at http://www.fido.asic.gov.au.