ICT Views

UK Market Abuse: How Prevalent is it?

by: (Financial Crime Compliance Course Director) on

So I may be a month behind the news, but still felt the need to put pen to paper (in my defence, my teaching schedule has been frantic – but I love it!!)…..

In February the FCA undertook a thematic review of Asset Managers and the Risk of Market Abuse (TR15/1), which was less than complementary in respect of those sampled – especially around the handling of inside information and the use of Chinese Walls.

power stationIn September 2015 the FCA reviewed the compliance frameworks and governance structures of firms trading and broking across the energy, metals, and soft commodities sectors, focusing particularly market abuse on systems and controls to prevent and detect market abuse. A sector that has not really been subject to much in the way of regulatory love (e.g. as compared to the traditional banking sector), many of the firms reviewed were found to have a poor awareness and widespread complacency around market abuse risks and inadequate arrangements for the prevention and detection of the same.

Some front office staff and senior management were found to hold the somewhat naive view that commodity markets are “too deep, too liquid and there are too many participants” to be manipulated and few firms could evidence that they had conducted a proper market abuse risk assessment or had ever submitted a Suspicious Transaction Report (STR). STR procedures themselves were found to be generally ineffective.

Other Sectors

Only days after the FCA published their findings, the UK energy regulator, Ofgem, published an open letter highlighting market manipulation and insider dealing concerns arising from its own monitoring of compliance with the EU Regulation on Wholesale Energy Market Integrity and Transparency (REMIT). As part of this review, it identified various market behaviours it had witnessed and considered as likely to be or potentially manipulative, including:

  • Layering. (A strategy in high-frequency trading where a trader makes and then cancels orders that they never intended to carry out. An order is placed to sell above the market bid price and subsequent orders place successively increasing bids for that same share. Once the initial requested bid price is reached and the owned shares are sold, the bids are all cancelled prior to execution. The share price returns to its original equilibrium which allows the trader to sell above the market bid price in less than a second)
  • Marking the close. (The practice of buying or selling a stock near the close of the day's trading in order to influence the closing price. Motivation might be to affect the valuation of a fund manager’s portfolio at the end of a quarter (called "window dressing"). 
  • Pre-arranged trading. (Involved parties making an agreement to submit a trade that will be reversed later to give a false impression of the supply or demand of a particular share or commodity)

These findings came on the back of a report in July where the FCA are quoted as stating that, despite a number of high profile cases, market abuse and insider trading has fallen sharply.

The True Picture

So my question and the reason I raise this in the first place – market abuse and insider trading is allegedly falling, yet certainly in at least 2 sectors concerns have been subsequently raised about the potentially abusive activity of market participants…if we extrapolate this and consider other sectors, what really is the state of affairs? Is the problem really reducing as a result of high profile enforcement actions or was this deflection to detract from the departure of Martin Wheatley and the return to more of a friendly relationship between the UK regulator and the big banks read this link and consider that these negotiations will have been going on behind the scenes for a number of months) I have to confess – in the light of contradictory information I am (professionally) skeptical as to the true state of affairs in relation to the scale of market abuse in the UK.

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