Public confidence in the fairness of markets enhances their liquidity and efficiency. Market manipulation harms, for example, the integrity of, and thereby undermines public confidence in, securities and derivatives markets by distorting prices, harming the hedging functions of these markets, and creating an artificial appearance of market activity.
Accordingly, authorities around the world need to have adequate systems in place to detect, investigate and prosecute market manipulations. While the character and harmful market effects of market manipulation are well known, the incentives, means and opportunities for carrying out manipulative schemes continue to evolve.
- Misconduct also jeopardises the integrity of the market and is considered unacceptable or improper behaviour by a person. Misconduct in the financial markets specifically disadvantages the market itself and the market participants, including but not limited to investors. Misconduct in the financial markets can occur in a wide range of asset classes and almost by everyone.
- Market abuse is a type of misconduct, which adversely affects the financial market and the country involved. There are various forms of wrongdoing in the financial markets. The most distinct categories of abusive behaviours are insider dealing, misuse of information, market manipulation and misselling.
These behaviours are divided into the following categories, all of which, staff members must be able to recognise:
- Insider dealing: This is perhaps the most popular form of market abuse. It occurs when an insider (a person that has access to a company’s secrets and information) with privileged knowledge, trades, tries to trade or encourages another person to trade or not trade based on inside information.
The unpublicised “privileged” information is significant both in terms of impact on the publicly listed financial products, like the shares of a company, as well as to their closely related financial products, like the respective derivatives.
The use of inside information becomes illegal when it is used outside the scope of the legit tasks that led to its acquisition; thus the “insider dealing” is the most common form of misuse of inside information. Insider dealing also applies when an order concerning a financial instrument previously entered into, is cancelled or amended based on inside information being received after the transaction has been concluded.
Insider dealing applies to any person who uses inside information under any circumstance not mentioned above and who knows or ought to know, that the information they possess is inside information.
Encouraging and/or inducing another person to engage in insider dealing occurs when a person holding inside information recommends that the other person buys or sells a financial instrument, or to amend an existing order based on inside information. Also, insider dealing occurs in the event that the other person acts on this information and knows, or ought to have known, that the recommendation took place using inside information.
The Market Abuse Regulation (MAR) prohibits attempted insider dealing and attempted market manipulation. There would be a defence, only if the transaction or order is proven to be legitimate, i.e. to prove that a transaction occurred or an order was placed before the acquisition of the inside information, and the Supervisory Authority acknowledged the following market practice(s) as legit and acceptable.
- Misuse of information: This behaviour is based on information that is not publicly available; if it were made public, it would influence an investor’s decision. Misuse of information may include the inappropriate disclosure of inside information.
- Market manipulation: Market manipulation describes several actions and/or behaviours that lead to the misleading of the market participants, including investors and the public, over the price, liquidity or value of a financial instrument. This includes behaviours that distort the market with incorrect information occurring via certain practices.
Specifically, market manipulation is related to entering into transactions, the dissemination of false or misleading information through the media, including the internet, or the transmitting of incorrect information or inputs related to a financial instrument or a benchmark, to give false or misleading signals to the market concerning supply, demand, or the price of an instrument, or to secure a price at an abnormal or artificial level.
Examples of Misconduct leading to Market Manipulation by Category:
- Price manipulation: any intentional attempt to establish or preserve an artificial market price for a security, commodity, or other financial instruments, for personal gain. Personal gain includes loss avoidance.
- Circular trading: the sale and repurchase of securities, matching in price, size and time of execution, which involve no resulting change in beneficial ownership or transfer of risk – this is used to create a false impression of the scale of activity in a security and to manipulate prices.
- Collusion and information sharing: a joint, typically clandestine, activity by at least two parties to disturb the legitimate and free operation of markets in pursuit of an abusive market strategy – this may involve sharing privileged information inappropriately. Individuals who coordinate their trading strategies to give a false impression of market activity or move market prices.
- Improper order handling: the improper execution or management of client orders by the intermediary or firm acting on their behalf.
- Misleading customers: this covers a range of abuses, including for example the misrepresentation and the manipulation of portfolio performance figures
