Today’s post is a true highlight as the offence of Market Abuse in the form of Manipulating Transactions has it all: Fancy jargon, hefty fines and plenty of case law, so hold tight to your seats.
Curb your enthusiasm for a minute though as we first need to have a look at the definition: The FSMA 2000 sets out manipulating transactions in section 118 (5) as behaviour that consists of effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with accepted market practices on the relevant market) which:
(a) give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments;
(b) secure the price of one or more such investments at any abnormal or artificial level.
This is represented in MAR 1.6 of the FCA Handbook, and there the FCA also gives an overview of behaviours, which, in the regulator’s opinion, are manipulating transactions involving false or misleading impressions:
The FCA gives in its Handbook an overview of behaviours, which, in the regulator’s opinion, are manipulating transactions involving false or misleading impressions:
(1) “Marking the close”, i.e. buying or selling qualifying investments at the close of the market with the effect of misleading investors who act on the basis of closing prices, other than for legitimate reasons;
(2) wash trades – that is, a sale or purchase of a qualifying investment where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion, other than for legitimate reasons;
(3) painting the tape – that is, entering into a series of transactions that are shown on a public display for the purpose of giving the impression of activity or price movement in a qualifying investment;
(4) entering orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer, and withdrawing them before they are executed, in order to give a misleading impression that there is demand for or supply of the qualifying investment at that price.
(5) buying or selling on the secondary market of qualifying investments or related derivatives prior to the auction with the effect of fixing the auction clearing price for the auctioned products at an abnormal or artificial level or misleading bidders in the auctions, other than for legitimate reasons.
At that point maybe a quick word on Wash Trades: The FCA points out that for the avoidance of doubt a stock lending/borrowing or repo/reverse repo transaction, or another transaction involving the provision of collateral, do not constitute a wash trade. However, another practical aspect in particular from the perspective of trade surveillance is the practice of moving stocks from one account to another or for the purpose of pricing especially for investment funds who need to assign a value to their holdings even if they are not trading; this can distort the view from the pure data perspective, so obviously a good surveillance officer should know the business quite well.
The FCA also lists a number of market related factors in the Handbook that should be taken into account whether a person’s behaviour amounts to market abuse in the form of manipulating transactions:
(1) the extent to which orders to trade given, bids submitted or transactions undertaken represent a significant proportion of the daily volume of transactions in the relevant qualifying investment on the regulated market or prescribed auction platform concerned, in particular when these activities lead to a significant change in the price of the qualifying investment;
(2) the extent to which orders to trade given, bids submitted or transactions undertaken by persons with a significant buying or selling position in a qualifying investment lead to significant changes in the price of the qualifying investment or related derivative or underlying asset admitted to trading on a regulated market;
(3) whether transactions undertaken lead to no change in beneficial ownership of a qualifying investment admitted to trading on a regulated market;
(4) the extent to which orders to trade given or transactions undertaken include position reversals in a short period and represent a significant proportion of the daily volume of transactions in the relevant qualifying investment on the regulated market concerned, and might be associated with significant changes in the price of a qualifying investment admitted to trading on a regulated market;
(5) the extent to which orders to trade given or transactions undertaken are concentrated within a short time span in the trading session and lead to a price change which is subsequently reversed;
(6) the extent to which orders to trade given change the representation of the best bid or offer prices in a financial instrument admitted to trading on a regulated market, or more generally the representation of the order book available to market participants, and are removed before they are executed;
(7) the extent to which orders to trade are given or transactions are undertaken at or around a specific time when reference prices, settlement prices and valuations are calculated and lead to price changes which have an effect on such prices and valuations.
Furthermore, in the opinion of the FCA, the following factors are to be taken into account in determining whether or not a person’s behaviour amounts to market abuse:
(1) the extent to which the person had a direct or indirect interest in the price or value of the qualifying investment or related investment;
(2) the extent to which price, rate or option volatility movements, and the volatility of these factors for the investment in question, are outside their normal intra-day, daily, weekly or monthly range;
(3) whether a person has successively and consistently increased or decreased his bid, offer or the price he has paid for a qualifying investment or related investment.
With regard to the second alternative under section 118 (5), price positioning, the FCA again provides with a useful description of behaviours it considers to be market abuse involving securing the price of a qualifying investment:
(1) transactions or orders to trade by a person, or persons acting in collusion, that secure a dominant position over the supply of or demand for a qualifying investment and which have the effect of fixing, directly or indirectly, purchase or sale prices or creating other unfair trading conditions, other than for legitimate reasons;
(2) transactions where both buy and sell orders are entered at, or nearly at, the same time, with the same price and quantity by the same party, or different but colluding parties, other than for legitimate reasons, unless the transactions are legitimate trades carried out in accordance with the rules of the relevant trading platform (such as crossing trades);
(3) entering small orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer, in order to move the price of the qualifying investment, other than for legitimate reasons;
(4) an abusive squeeze – that is, a situation in which a person:
(a) has a significant influence over the supply of, or demand for, or delivery mechanisms for a qualifying investment or related investment or the underlying product of a derivative contract;
(b) has a position (directly or indirectly) in an investment under which quantities of the qualifying investment, related investment, or product in question are deliverable;
(c) engages in behaviour with the purpose of positioning at a distorted level the price at which others have to deliver, take delivery or defer delivery to satisfy their obligations in relation to a qualifying investment (the purpose need not be the sole purpose of entering into the transaction or transactions, but must be an actuating purpose);
(5) parties, who have been allocated qualifying investments in a primary offering, colluding to purchase further tranches of those qualifying investments when trading begins, in order to force the price of the qualifying investments to an artificial level and generate interest from other investors, and then sell the qualifying investments;
(6) transactions or orders to trade employed so as to create obstacles to the price falling below a certain level, in order to avoid negative consequences for the issuer, for example a downgrading of its credit rating;
(7) trading on one market or trading platform with a view to improperly influencing the price of the same or a related qualifying investment that is traded on another prescribed market,
(8) conduct by a person, or persons acting in collusion, that secure a dominant position over the demand for a qualifying investment which has the effect of fixing, directly or indirectly, auction clearing prices or creating other unfair trading conditions, other than for legitimate reasons.
The importance of manipulating transactions through abusive squeezes is highlighted by the additional guidance the FCA provides in the Handbook on the topic.
MAR 1.6.11 to MAR 1.6.13 provider further clarification on factors that need to be taken into account:
(1) the extent to which a person is willing to relax his control or other influence in order to help maintain an orderly market, and the price at which he is willing to do so; for example, behaviour is less likely to amount to an abusive squeeze if a person is willing to lend the investment in question;
(2) the extent to which the person’s activity causes, or risks causing, settlement default by other market users on a multilateral basis and not just a bilateral basis. The more widespread the risk of multilateral settlement default, the more likely that an abusive squeeze has been effected;
(3) the extent to which prices under the delivery mechanisms of the market diverge from the prices for delivery of the investment or its equivalent outside those mechanisms. The greater the divergence beyond that to be reasonably expected, the more likely that an abusive squeeze has been effected;
(4) the extent to which the spot or immediate market compared to the forward market is unusually expensive or inexpensive or the extent to which borrowing rates are unusually expensive or inexpensive.
MAR 1.6.12 emphasises that market tightness doesn’t necessarily be itself abusive, nor does having a significant influence over the supply of or demand for an investment, whilst MAR 1.6.13 points to the overall market behaviour in relation to the effects of an abusive squeeze.
With so much guidance and clarification already provided in the rules, the FCA naturally gives a couple of examples in the Handbook for manipulating transactions:
(1) a trader simultaneously buys and sells the same qualifying investment (that is, trades with himself) to give the appearance of a legitimate transfer of title or risk (or both) at a price outside the normal trading range for the qualifying investment . The price of the qualifying investment is relevant to the calculation of the settlement value of an option. He does this while holding a position in the option . His purpose is to position the price of the qualifying investment at a false, misleading, abnormal or artificial level, making him a profit or avoiding a loss from the option;
(2) a trader buys a large volume of commodity futures, which are qualifying investments, (whose price will be relevant to the calculation of the settlement value of a derivatives position he holds) just before the close of trading. His purpose is to position the price of the commodity futures at a false, misleading, abnormal or artificial level so as to make a profit from his derivatives position;
(3) a trader holds a short position that will show a profit if a particular qualifying investment, which is currently a component of an index, falls out of that index. The question of whether the qualifying investment will fall out of the index depends on the closing price of the qualifying investment. He places a large sell order in this qualifying investment just before the close of trading. His purpose is to position the price of the qualifying investment at a false, misleading, abnormal or artificial level so that the qualifying investment will drop out of the index so as to make a profit;
(4) a fund manager’s quarterly performance will improve if the valuation of his portfolio at the end of the quarter in question is higher rather than lower. He places a large order to buy relatively illiquid shares, which are also components of his portfolio, to be executed at or just before the close. His purpose is to position the price of the shares at a false, misleading, abnormal or artificial level;
(5) and lastly an example of an abusive squeeze: A trader with a long position in bond futures buys or borrows a large amount of the cheapest to deliver bonds and either refuses to re-lend these bonds or will only lend them to parties he believes will not re-lend to the market. His purpose is to position the price at which those with short positions have to deliver to satisfy their obligations at a materially higher level, making him a profit from his original position.
In 2009 the FSA was so concerned about the manipulation of the order book in the form of layering or spoofing, it focused on the subject as part of its periodical publication Market Watch (http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter33.pdf). With firms offering clients direct market access (DMA), the FSA was worried about the controls of such access since it had seen a rise in intentional patterns of behaviour to mislead markets through layering or spoofing when clients:
(1) layer the order book, in which multiple orders are submitted at different prices on one side of the order book slightly away from the touch;
(2) submitted an order to the other side of the order book (which reflected the client’s true intention to trade);
(3) following the execution of the latter order, rapidly removing the multiple initial orders from the book
As a result all exchanges and MTFs were advised to introduce procedures to prevent this activity from taking place.
Though this guidance might seem out-dated, it is actually particularly relevant with regard to new trading technologies and the potential for market abuse through high frequency trading (HFT). HFT is a key focus for regulators around the globe and certain kinds of HFT or algorithmic trading will be forbidden under the EU Market Abuse Regulation. We tackle this topic in a separate post, but it is a good example for the evolution of market abuse.
As promised, we conclude this article with a large selection of cases of market abuse in the form of manipulating transactions:
– FCA fines compliance officer and broker whose actions enabled market abuse to be committed in October 2010
The Financial Conduct Authority (FCA) has fined David Davis, senior partner and compliance officer of Paul E Schweder Miller & Co, £70,258, and Vandana Parikh, a broker at the same firm, £45,673, for failing to act with due skill, care and diligence in the period leading up to the illegal manipulation of the closing price of securities traded on the London Stock Exchange (LSE) by Rameshkumar Goenka, a Dubai based private investor, in October 2010. For more information on the case, click here: http://www.fca.org.uk/news/fca-fines-compliance-officer-and-broker
– FSA fines Dubai based investor US$ 9.6 million for market abuse
The Financial Services Authority (FSA) has fined Rameshkumar Goenka, a Dubai based private investor, $9,621,240 (approximately £6 million) for manipulating the closing price of Reliance Industries (Reliance) securities on the London Stock Exchange (LSE). For more information on the case, click here: http://www.fsa.gov.uk/library/communication/pr/2011/094.shtml
– FCA fines US based oil trader US $903K for market manipulation
The Financial Conduct Authority (FCA) has fined US based High Frequency Trader, Michael Coscia, US $903,176 (£597,993) for deliberate manipulation of commodities markets. For more information on the case, click here: http://www.fca.org.uk/news/fca-fines-us-based-oil-trader
– FCA bans and fines trader £662,700 for manipulating gilt price during QE Mark Stevenson, a bond trader with nearly 30 years’ experience, has been banned from the industry and fined £662,700 for deliberately manipulating a UK government bond (gilt) on 10 October 2011. Stevenson intended to sell his holding, worth £1.2 billion, to the Bank of England (the Bank) for an artificially high price during quantitative easing (QE) operations that day. His unusual trading was reported within 40 minutes and the Bank decided not to buy that gilt as part of QE. For more information on the case, click here: http://www.fca.org.uk/news/fca-bans-and-fines-trader-660k-for-manipulating-gilt-price-during-qe
– FCA secures High Court Judgment awarding injunction and over £7 million in penalties against five defendants for market abuse
The High Court today held that the Financial Conduct Authority (FCA) is entitled to permanent injunctions and penalties totalling £7,570,000 against Da Vinci Invest Ltd, Mineworld Ltd, Mr Szabolcs Banya, Mr Gyorgy Szabolcs Brad and Mr Tamas Pornye for committing market abuse. The defendants were found to have committed market abuse in relation to 186 UK-listed shares using a manipulative trading strategy known as “layering”. For more information on the case, click here: http://www.fca.org.uk/news/fca-secures-high-court-judgment-awarding-injunction-and-over-7-million-in-penalties
– Tribunal upholds FSA decision to fine firm £8m for market abuse
The Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine Swift Trade, a non-FSA authorised Canadian company with global operations, £8m for market abuse. The Tribunal described this as being “as serious a case of market abuse of its kind as might be imagined”.
In 2011 British regulators fined Swift Trade £8 million for using the technique and the firm went out of business. The case drew a lot of attention as Swift Trade was a Canadian firm and it was one of the first cases of the FSA (Financial Services Authority) fining foreign firms. For more information on the case, click here:
– Tribunal upholds FSA decision to ban and fine hedge fund CEO and CFO £2.1m for deceiving investors and market abuse
The Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine Michiel Weiger Visser £2 million and Oluwole Modupe Fagbulu £100,000 and ban them both from performing any role in regulated financial services for breaching Principle 1 of the FSA’s Statements of Principle for Approved Persons and for engaging in market abuse. For more information on the case, click here: http://www.fsa.gov.uk/library/communication/pr/2011/071.shtml
– FSA bans and fines self employed trader £700,000 for market abuse
The Financial Services Authority (FSA) has obtained a court order preventing Barnett Michael Alexander, a self employed trader, from committing market abuse and ordering him to pay a £700,000 fine and £322,818 in restitution to firms which experienced a loss as a result of his actions. For more information on the case, click here: http://www.fsa.gov.uk/library/communication/pr/2011/053.shtml
– FSA fines individual £1m and secures first final High Court injunction to prevent market abuse
The Financial Services Authority (FSA) has fined Samuel Kahn £1,094,900 and obtained a High Court injunction restraining him from committing market abuse. This is the first time the FSA has secured a final injunction from the High Court to prevent market abuse and also the first fine calculated under the new penalties system. For more information on the case, click here: http://www.fsa.gov.uk/library/communication/pr/2011/044.shtml
– FSA bans Graham Betton for market abuse
The Financial Services Authority (FSA) has banned Graham Betton from working in financial services, following his role in a scheme that set out to ramp up the share price of Fundamental-E Investments (FEI). The Upper Tribunal (Tax and Chancery Chamber, (the Tribunal)) is considering the fine that is appropriate for his actions and will announce this at a later date. For more information on the case, click here: http://www.fsa.gov.uk/library/communication/pr/2010/171.shtml
– FSA fines Stefan Chaligné and Patrick Sejean
The FSA fined Stefan Chaligné and prohibited him from performing regulated activities for undertaking market manipulation in conjunction with Patrick Sejean. The fine consisted of a disgorgement element of €362,950 and a separate penalty of £900,000. Mr Chaligné was a hedge fund manager who engaged in ‘window-dressing the close’, deliberately manipulating the market in certain securities so as to increase their closing prices. For more information on the case, click here: http://www.fca.org.uk/your-fca/documents/final-notices/2013/fsa-final-notice-2013-stefan-chaligne
– FSA imposes fines of £4.25m on Winterflood and two traders for market abuse following success in Court of Appeal
The Financial Services Authority (FSA) won its market abuse case in the Court of Appeal against Winterflood and two of its traders, Stephen Sotiriou and Jason Robins. The appeal hearing follows an earlier finding of market abuse by the Financial Services and Markets Tribunal (the Tribunal). For more information on the case, click here: http://www.fsa.gov.uk/library/communication/pr/2010/071.shtml
For more examples, have a look at the FCA’s Market Abuse Outcome page, where the FCA continues to publish information about action it has taken against market abuse and other related conduct: http://www.fca.org.uk/firms/markets/market-abuse/outcomes
If you have missed any of the previous instalments of this series, have a look here.
Follow our series on the 7 deadly sins of Market Abuse in the next article on “Manipulating Devices”.