Report about error or idea
YouControl
logo youcontrol
ENG
youcontrol youcontrol
0 800 309 077
Free call

Register and check 10 companies for free, or get a phone consultation by calling us at 0 800 309 077.

Introduction to Market Abuse
20 min

The Market Abuse Regulation (596/2014/EU) (MAR) came into force on July 3rd 2016, and reversed the previous Market Abuse Directive (2003/6/EC) (MAD), replacing it with an extended scope and expanded civil market abuse regime across the EU. It aims to increase market integrity and investor protection, while enhancing the attractiveness of securities markets for capital raising.

The following categories of behaviour are defined as a market abuse in Market Abuse Regulation:

  • Insider Dealing - when inside information is improperly used (or is attempted to be used) by an insider, including using inside information to amend or cancel an order.
  • Unlawful Disclosure - where an insider unlawfully discloses inside information to another person, including inducing someone to transact on the basis of inside information.
  • Market Manipulation - gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument, a related spot commodity contract or an auctioned product based on emission allowances;[1]

Market Abuse applies to financial instruments:

  • admitted to trading on a regulated market or for which a request for admission to trading on a regulated market has been made.
  • traded on an MTF (multilateral Trading Facility), admitted to trading on an MTF or for which a request for admission to trading on an MTF has been made.
  • traded on an OTF (Organised Trading Facility).
  • not covered by points (a) - (c) but is one in which the price or value depends on or has an effect on the price or value of a financial instrument referred to (a) – (c), including, but not limited to, credit default swaps and contracts for difference.

It is a civil offence to breach the MAR, which can be imposed by unlimited fines in the EU. In the UK, criminal sanctions for insider dealing and market manipulation can incur custodial sentences of up to 7 years and unlimited fines.

 

What is Insider Dealing?

This type of behaviour occurs where an insider deals, attempts to deal or refrains from dealing based on inside information relating to the investment in question. 

Inside information is:

  • information of a precise nature, which has not been made public;
  • relates directly or indirectly, to one or more issuers or to one or more financial instruments;

and 

  • if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.

Information that is considered precise, is information that indicates a set of circumstances which exists or which may reasonably be expected to come into existence, or an event which has occurred or which may reasonably be expected to occur and where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of the financial instruments or the related derivative financial instrument in question.

Information would be likely to have a significant effect on price if it is information that a reasonable investor would be likely to use as part of the basis of his or her investment decisions. 

Behaviour typical of insider dealing includes:

  • Dealing on the basis of inside information;
  • Front running / pre-positioning - A transaction undertaken for a person’s own benefit on the basis of (and ahead of) an order that he is to carry out with or for another (in respect of which information concerning the order is inside information, which takes advantage of the anticipated impact of the order on market price);
  • In the context of a takeover, an offeror or potential offeror entering into a transaction, on the basis of inside information concerning the proposed bid, that provides an economic exposure to movements in the price of the target company’s shares (for example, a spread bet); and
  • In the context of a takeover, a person who acts for the offeror or potential offeror dealing for his own benefit in a qualifying investment or related investment on the basis of information concerning the proposed bid which is inside information.

Person may typically come into possession of inside information through the following (non-exhaustive) variety of ways:

  • having such information disclosed to them, whether unlawfully or otherwise;
  • being aware of a potential placement, deal or similar activity that involves listed instruments and that has yet to be disclosed publicly;
  • being aware of profits or losses in a client’s account which have not been publicly disclosed, and which may impact their own or a related company’s share price; or
  • being aware of clients’ pending orders.

Working in the financial sector can be quite challenging. A lot of professionals have access to the inside information and very often they use this information to make a profit. After the 2008 crisis, the regulators around the world put a lot of effort into monitoring and detecting insiders. Currently there are a lot of automated systems to monitor emails and telephones conversations, and any suspicious transactions that may arise on the market. The regulated companies are required to provide adequate systems and controls to prevent insider dealing and report any suspicions to the local authorities.

 

What is Unlawful Disclosure?

Unlawful disclosure refers to the act of revealing inside information to a third party without following the proper processes and procedures for dissemination of such information, except where the disclosure is made in the normal exercise of an employment, a profession or duties. To prevent unlawful disclosure, MAR mandates the use of insider lists which help track who has (had) access to inside information at a specific moment in time.

Professionals are prohibited from making unlawful disclosures and must obtain prior approval from the Head of Compliance or Money Laundering Reporting Officer before making any disclosures of inside information. 

This information can be related to acquisitions, financial results, new Board or CEO appointments, or any information that can have a significant price on a company's share price.

 

What is Market Manipulation? 

Market manipulation refers to artificial inflation or deflation of the price of a security. It is also  known as price manipulation or stock manipulation, which involves the literal manipulation of a financial market for personal gain. It means influencing the behaviour of the securities with the intent to do so.

Market manipulation is comprised of four broad activities:

  • manipulating transactions;
  • manipulating devices;
  • disseminating manipulative information; or
  • any other form of misleading or distortive behaviour.

A manipulating transaction is one where a person enters into a transaction, places an order to trade, or conducts any other behaviour which:

  • gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of a financial instrument;

or

  • secures, or is likely to secure, the price of one or several financial instruments at an abnormal or artificial level.

Examples of manipulating transactions include those being undertaken to give false and misleading impressions:

  • banging the close - Buying or selling investments at the market close, with the effect of misleading investors, who act on the basis of closing prices, unless undertaken for legitimate reasons.
  • wash trades - The sale or purchase of an investment where there is no change in beneficial interest or market risk, or where the transfer of beneficial risk or market risk is between parties acting in collusion unless undertaken for legitimate reasons.

  • painting the tape - Entering into a series of transactions that are shown to the market for the purpose of giving the impression of trading activity or price movement.
  • spoofing - Entering orders on an electronic order 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 investment at that price.

  • quote stuffing - Involves quickly entering and withdrawing a large number of orders in an attempt to flood the market and to create uncertainty for other participants.
  • momentum ignition - Entering of a sequence of trades with the intention of starting or exacerbating a trend, in order to create an opportunity to later unwind the position at a favourable price.
  • or those being undertaken for price positioning purposes (i.e. colluding with others to control supply or demand for an investment, abusive squeezes or trading on one market or trading platform in order to improperly influence the price on another market of the same or related investment.

A manipulating device occurs in those situations where a person enters into a transaction, places an order to trade or any other activity or behaviour which affects or is likely to affect the price of one or several financial instruments and which employs a fictitious device or any other form of deception or artificiality.

The dissemination of manipulative information offence occurs where information disseminated through the media, including the internet or other means, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of any financial instrument, or is likely to secure, the price of such financial instruments at an abnormal or artificial level. This offence also includes the dissemination of rumours, where the person who made the dissemination knew, or ought to have known, that the information was false or misleading (further information on rumours is detailed on pg 9).

Lastly, the offence of engaging in any other misleading behaviour or distortion takes place where a person transmits false or misleading information or provides false or misleading inputs in relation to a benchmark, where they knew or ought to have known that it was false or misleading, or any other type of behaviour that manipulates the calculation of a benchmark.

 


 

[1] REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014

 

The author of the lesson: Tetyana Golovata, Compliance Officer at Schroders (Cazenove Capital), United Kingdom

 

Отримайте знання від кращих експертів на ринку
Реєстрація в академії
Add "YouControl" app to your home screen
Press load -> ‘Add to Home Screen’