New Examples of Market Manipulation


UK FCA Publishes Additional Examples of Market Manipulation

With the regulatory focus firmly on deterring market abuse, new exemplars of manipulation are being defined for market participants to detect. Can your surveillance system be easily configured to pick up these new cases?

ESMA and ACER have always made it clear in their guidance notes for market participants that the examples of trader practice constituting market manipulation – grouped into three families of ‘False or misleading Signals’, ‘Price Securing’, and ‘Fictitious Devices’ – comprise a non-exhaustive list. They caution that a specific trading practice may involve more than one type of market manipulation, and that there will be cases of overlap. Market participants must always be vigilant for instances of market abuse even if the practice itself does not fall neatly into one of the examples.

The advances in communications technology and social media provide fertile ground for new variations on the theme of market manipulation, and have attracted the attention of the NCAs and NRAs responsible for MAR enforcement. Indeed, the UK FCA has recently expressed concern about the use of trading platforms and persistent chat systems by broking firms to advertise order and trade prices which are not supported by actual client order and trades, and are in fact fictitious.

The FCA has introduced two new examples of market manipulation – ‘Flying’ and ‘Printing’ :

’Flying’ involves a firm communicating to other market participants, via screen, instant message, voice or other method, that it has bids or offers when they are not supported by, or sometimes not even derived from, an order or a trader’s actual instruction.

’Printing’ involves communicating, by one of the above methods, that a trade has been executed at a specified price and/or size, when no such trade has taken place.

In both cases if false prices and/or trading activity are advertised to the market there is a risk that trading decisions may be made based on misleading information, which is contrary to MAR and REMIT.

Although they are new examples, ‘Flying’ and ‘Printing’ actually fall into the existing abuse family of ‘False and misleading Signals’. The difference, albeit a fine distinction, is the broadening of the media of communication to add ‘persistent chat’ and ‘instant messaging systems’ to traditional screen-based channels.

The FCA is very keen that these new systems are brought firmly into the scope of MAR compliance. It’s not that using these new systems is abusive, it’s just what is shown on them must conform to the MAR requirements that order, price, and trade data must not mislead other market participants as to the true state of the market. The onus is now on market participants to ensure that where they do use persistent chat or instant messaging systems, any information displayed must be subject to surveillance and be clearly qualified as ‘indicative’ unless it is backed up by real orders or trades.

The FCA recommends that market participants recognise the points it raises regarding ‘Flying’ and ‘Printing’, and ensure that they have the processes in place for training staff about the potentially abusive nature of these practices. Furthermore, market participants must implement oversight and control processes to ensure that the orders and trade data which their staff place on trading venues or share via persistent chat and instant messaging systems, and publicly report, do not give false or misleading impressions of the market.

The FCA also states that market participants must ensure their surveillance system can identify instances of ‘Flying’ and ‘Printing’. Market participants need to conduct an assessment of their capabilities as soon as possible, and if they find any instances of this practice having occurred, they must inform their appropriate regulator(s). The FCA does have an ongoing policy of visiting market participants to assess their MAR compliance programmes, so dismissing ‘Flying’ and ‘Printing’ as merely an exercise in splitting hairs is not an option.

Behind the scenes the UK FCA is very influential in the formulation and detection of examples of market manipulation, so where the FCA leads other NCAs are likely to follow. As ‘Flying’ and ‘Printing’ can be applied to energy trading, it is inevitable that ACER will become aware and will add them to its list of REMIT example trader malpractices.

In view of the burgeoning list of abuse case examples, we believe that the safest approach for market participants is to apply the ‘spirit’ of MAR and REMIT with regard to the general detection and prevention of market manipulation, and not the ‘letter’ as presented in ESMA’s and ACER’s listed examples. Adding the surveillance of persistent chat and instant messaging systems does have implications for system design and integration, personal data, and the development of surveillance rules as it stresses flexibility, rather than restricting functionality to detecting a fixed set of abuse ‘exemplars’.

For more information on how deltaconX can help you address these MAR and REMIT issues, please contact us.

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