What is Market Abuse?

What is Market Abuse? Everyone seems to have an idea of what it is supposed to be, but what does it really mean? Well, it depends. It depends on the jurisdiction, since most jurisdictions globally consider it generally illegal, but rules vary from country to country. But before this creates even more confusing, this article will give an overview on Market Abuse and its different forms; future articles will then try to explain in more detail its various aspects and the regulation in different jurisdictions.

 

Definition

In its recent Market Abuse Regulation (“MAR”), the European Union defines market abuse as “a concept that encompasses unlawful behaviour in the financial markets”. With regard to MAR, the legislator elaborates further that “it should be understood to consist of insider dealing, unlawful disclosure of inside information and market manipulation. Such behaviour prevents full and proper market transparency, which is a prerequisite for trading for all economic actors in integrated financial markets”.

The EU has set with its previous Market Abuse legislation in 2005 and the current set of new rules in the form of the second Market Abuse Directive and the Market Abuse Regulation a framework for a EU-wide Market Abuse regime. The new rules will apply from 3 July 2016. However, as said above though, legislation varies from country to country, and despite this general framework, this also applies within the EU. Why? On one hand, because of differences in the implementation of EU directives as, for example, the UK regulator had chosen to go beyond the minimum standards of the first Market Abuse Directive and continue with a stricter set of rules; on the other hand, because some countries like the UK have chosen to opt out of the second Market Abuse Directive. The Market Abuse Regulation will apply in the UK as well though.

 

Types of Market Abuse

In principal, the behaviour that can amount to Market Abuse can be divided into either a form of abuse of information or market manipulation.

Abuse of information can be defined as where a person has information that is not publicly available and makes use of such information for a personal gain.

Market manipulation can be defined as a situation where a person gives out knowingly false or misleading information to influence the price of a stock for a personal gain.

As said before, the UK has chosen a stricter and more specific set of types of behaviour that can potentially constitute Market Abuse. The seven types are briefly described below with the first three kinds of behaviour basically constituting a form of abuse of information, while the other four could be defined as a form of market manipulation.

  1. Insider dealing – when an insider deals, or tries to deal, on the basis of inside information.
  2. Improper disclosure – where an insider improperly discloses inside information to another person.
  3. Misuse of information – behaviour based on information that is not generally available but would affect an investor’s decision about the terms on which to deal.
  4. Manipulating transactions – trading, or placing orders to trade, that gives a false or misleading impression of the supply of, or demand for, one or more investments, raising the price of the investment to an abnormal or artificial level.
  5. Manipulating devices – trading, or placing orders to trade, which employs fictitious devices or any other form of deception or contrivance.
  6. Dissemination – giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading.
  7. Distortion and misleading behaviour – behaviour that gives a false or misleading impression of either the supply of, or demand for, an investment; or behaviour that otherwise distorts the market in 
an investment.

These descriptions are taken from the FCA’s factsheet on Market Abuse, which can be found here, and future articles on the subject will discuss these definitions in more detail.

 

Inside Information

What all types of behaviour have in common is that they require the individual that abuses the markets to have inside information. For information to qualify as inside information it has to be

  • precise information;
  • not generally available;
  • information a reasonable investor would use to make an investment decision; and
  • information, that if generally available, would likely have a significant impact on the price of an investment.

Again, future posts will look into the various aspects of inside information in more detail.