Understanding market abuse in the age of market surveillance 2.0 - Part 2

The deliberate – and fraudulent – influencing of market information 

Don’t take everything on trust. If something doesn’t look right, challenge it 

In this three-part blog series, we look at how market abuse is being perpetrated and the challenges for new market surveillance controls/ solutions. Part 1 provided a definition of market abuse and the techniques used for gaining market information. In Part 2 we review how offenders try to influence the market, while Part 3 talks about how offenders hide information and other noteworthy behaviours.

Knowing the signs and symptoms in advance can provide a useful alert to potentially fraudulent abuses of the market.

Influencing information

“Fake it till you make it”. Inflate market share

Fund managers, sales or market makers who want to generate more business may want to create the impression that they are the centre of action with whom everybody trades. They can ramp up their trading volumes to attract customers by cross-trading against themselves or using a facilitator (e.g. trading against a “friend"). In a less convoluted way, they can simply report false trading volume on the market. Besides external motivation, ramping market share can be used for political reasons to look “good” to their own organisation.

“Make it (look) real”. Mark price

Market abuse is often thought to begin with a done trade. That does not need to be the case. Marking a price by printing a price on the market can be done directly or indirectly.

Any interaction with the market, such as orders and quotes, can influence market direction. Orders alone can suggest/support a direction. This can be done by entering a large order (or multiple orders) to suggest a strong interest. Offenders will try to avoid all executions or keep it to a minimum. For example, this can be achieved by adjusting orders to lose priority, staying at a relatively safe distance from the market or using layering (see the first blog in our series). An example of layering would be to send multiple bid orders (suggesting high demand) to try to sell a higher ask price.

For a cost, it can be worthwhile to aggressively trade prices (directly or through derivatives) to shift the market. This can be done for valuation purpose on a market opening/ close. For example, a portfolio manager can mark the valuation of his portfolio at a low cost by using low liquidity assets with a significant weighting in his portfolio.

“Rumour has it”. Spread false information  

Not everyone has access to insider information. For those not on the “inside”, another strategy is to mislead the market by spreading false information and rumours. The internet, along with social media, offer a multitude of ways to spread false influence. Blogs, chatrooms and Twitter traffic may play a role here. Corporates can also deliberately issue misleading statements, either positive or negative, to take advantage of investors who are motivated to sell more or buy back. 

Actions and movements initiated by honest players are the heart of a dynamically healthy market. But, deliberate distortions result in skewed market dynamics, damaging honest trading. Informed and active scrutiny of market movements and market information is key. Nobody within a bank can afford to be asleep on the job. If something “just doesn’t look right” – anomalous movements in assets or sudden and dramatic market information, for example - challenge it. The worst that can happen is that it turns out to be legitimate. And you may even block major fraud.