Market Abuse – ESMA advises EU Commission on new regime

Market abuse is an allegation that regularly comes up associated with certain companies – frequently those listed on AIM. There has been an EU Directive on market abuse for some years, which laid down what EU countries should legislate against via suitable regulations. In the UK that framework was actually extended somewhat and you can see the current UK regulations under the “Code of Market Conduct (MAR1)” handbook – see http://www.fshandbook.info/FS/html/FCA/MAR/1.

You just need to look at the headings of the chapters in that document to understand some of the common types of market abuse, For example: insider dealing, improper disclosure, manipulating transactions, manipulating devices, dissemination, misleading behaviour and distortion. Or read Section 1.7.2 which says:

“The following behaviours are, in the opinion of the FCA, market abuse (manipulating devices):

(1) taking advantage of occasional or regular access to the traditional or electronic media by voicing an opinion about a qualifying investment (or indirectly about its issuer, if applicable) while having previously taken positions on, or submitted bids in relation to that qualifying investment and profiting subsequently from the impact of the opinions voiced on the price of that instrument, without having simultaneously disclosed that conflict of interest to the public in a proper and effective way;

(2) a transaction or series of transactions that are designed to conceal the ownership of a qualifying investment, so that disclosure requirements are circumvented by the holding of the qualifying investment in the name of a colluding party, such that disclosures are misleading in respect of the true underlying holding. These transactions are often structured so that market risk remains with the seller. This does not include nominee holdings;

(3) pump and dump – that is, taking a long position in a qualifying investment and then disseminating misleading positive information about the qualifying investment with a view to increasing its price;

(4) trash and cash – that is, taking a short position in a qualifying investment and then disseminating misleading negative information about the qualifying investment, with a view to driving down its price.

Readers of ShareSoc’s newsletters all know of a few allegations made last year about such behaviour.

The EU Commission is in the process of issuing a new Market Abuse Directive which may become law in 2016 so as to strengthen regulations in this area. The UK will of course need to implement the Directive into UK law and regulations (including criminal law).  The European Securities and Markets Authority (ESMA) have just published a document which advises the Commission on the implementation of this regime under the title “Final Report: ESMA’s technical advice on possible delegated acts concerning the Market Abuse Regulation“. Not exactly a catchy title but you can read it here: http://www.esma.europa.eu/system/files/2015-224.pdf .

The document seeks to explain what regulators might look for as indicators of market abuse, so it provides a very comprehensive overview of all the dubious practices that might be present in the financial world. So if you want to know what a “ping order” or “phishing order” is, it’s defined in there. Or an “abusive squeeze”, “cross-product manipulation”, “wash trades”, “painting the tape”, “quote stuffing” and numerous other malpractices.  So for those interested in the arcane terminology of market abuse, this document provides a very good primer.

It provides a useful handbook in that regard, but proving market abuse or getting your national regulator (the FCA in the UK of course) to act on it might be a lot more difficult than you imagine. But it makes for an interesting read for those fascinated by the lengths to which market participants will go so as to make money.

Roger Lawson

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