Australian equity markets are operating with a “high degree of integrity” according to a new ASIC report on the “cleanliness” of the market.

ASIC today released a report examining market cleanliness between November 2015 and October 2018. A clean market is described as one in which prices react immediately after new information is released through the ASX’s market announcements platform.

Abnormal price movements and unusual trading patterns ahead of material announcements could suggest an “unclean market”, ASIC says.

The new report focused on insider trading and information leaks ahead of price-sensitive announcements and found that, despite a deterioration in 2016, market cleanliness improved across 2017 and 2018 to settle around 2015 levels.

On average, just 0.6 per cent of accounts that traded before price-sensitive announcements were deemed suspicious.

However, there is plenty of room for improvement. Suspicious accounts profitably traded on average 5.1 per cent of the volume before each announcement, and while there was no increase in the number of suspicious accounts, the volume traded by such accounts increased.

Small cap companies are also in ASIC’s sights: the body’s commissioner Cathie Armour said announcements by smaller companies were more likely to be unclean.

“Markets cannot operate with a high degree of integrity if people trade with inside information. We expect all parties involved in mergers and acquisitions to put in place meaningful confidentiality controls at the start of a transaction – and make sure the controls are rigorously followed. Controls for some small cap companies are clearly lacking and need to be tightened,” she said.

ASIC has been tightening its regulation of small cap companies in recent times, following scandals from companies like GetSwift (ASX:GSW) and the now-defunct Big Un which revealed they had misled investors.

That strategy appears to be paying off, with queries from the ASX falling year-on-year.