The UK’s Financial Conduct Authority (FCA) has recently published the latest issue of Market Watch – its newsletter on market conduct and transaction reporting issues. This issue focuses on market manipulation and the controls that the regulator deploys to detect and prevent it.
As a direct communication from the regulator, these newsletters serve as a notice of intention when it comes to market management. They also highlight key areas of focus that firms and trading venues should approach carefully to ensure compliance with the law.
In this article, we unpack the contents of the FCA’s Market Watch Issue 67 and explain what the findings mean for trading venues and market participants.
The Law Explained: Article 16 of the Market Abuse Regulation
On 1 January, the UK Market Abuse Regime (MAR) onshored the EU’s Market Abuse Regulation (EU MAR). This move effectively codified the EU framework into domestic law, and ensures that the UK markets and financial instruments can benefit from relative continuity post-Brexit.
Much of the FCA’s work to combat market manipulation is underpinned by Article 16 of MAR. This requires any person professionally arranging or executing transactions to establish and maintain effective systems and procedures to detect and report suspicious orders and transactions. This duty extends to firms providing investment services under MiFID.
In plain terms, the law requires firms and trading venues to monitor for and report suspicious transactions to the FCA. Article 16 of UK MAR prescribes that Suspicious Transaction and Order Reports (STORs) must be used for this purpose.
The FCA’s Approach to Market Manipulation
It’s the function of STORs and other reporting data that the FCA focuses on in Market Watch 67. As outlined below, there are a number of strategies that the regulator deploys to identify suspicious activity and mitigate against market manipulation.
1. Using Data to Identify Suspicious Activity
UK equity trading venues have been required to provide order book records to the FCA since 2017. According to the latest reports, approximately 150 million are filed per day. These are amalgamated to provide a single holistic picture of the market at any one time. This snapshot view makes it easier for FCA analysts to identity manipulative trading.
In Market Watch issue 59, the FCA highlighted the negative impact of inaccurate reporting by firms and trading venues, explaining that it may limit their ability to effectively monitor for market abuse. Firms are reminded of the importance of ensuring that their systems use adequate client coding, and it’s worth noting that the FCA regularly investigates those who do not comply with reporting best practice.
2. Supervising Staff Conduct
The FCA’s work is supported by a set of surveillance algorithms that identify manipulative trading strategies. Examples of commonly detected schemes include spoofing, layering, ramping, reference price gaming, and a range of other prohibited behaviours.
These surveillance algorithms are used to monitor for patterns of behaviour that suggest impropriety on the part of a firm or individual trader. In one instance, a trader’s activity gave rise to concerns about ‘spoofing’.
This goes to show that the regulator is proactive when it comes to policing trading activity in the UK. In this case, the FCA commenced a more detailed enquiry and the firm introduced additional market abuse training alongside enhanced surveillance measures.
3. Addressing the Effect of Algorithms
In a similar way, the FCA’s surveillance algorithms have also trained their sights on an altogether different challenge: other algorithms.
Following patterns of behaviour and comparing them to the wider marketplace, the FCA’s surveillance program detected questionable trading practices by an algorithmic firm and analysed their potential impact on the market. As a result of the FCA’s findings, the firm adjusted the algorithm and its control framework to prevent it from having an undue influence on the market.
This approach further displays the FCA’s proactive approach to protecting the integrity of the markets. In cases of algorithmic trading, firms may not have a full appreciation of their effect on the market without an understanding of how their strategy impacts on prices and other factors. It’s in such cases when the regulator can draw on its huge bank of data to inform future enforcement action.
Targeted Action to Protect the Markets
Through its deployment of these strategies, the FCA has cast a wide net over potential market manipulators. Firms and trading venues must carefully apply the correct checks and monitoring systems to ensure their activities comply with the law – including Article 16 of UK MAR.
The regulator has penalised several traders and firms in recent times, with several having been issued with final notices following the identification of potential wrongdoing by the FCA’s algorithms. The sanctions issued include significant fines with a combined total of over £150,000. Those individuals concerned have also been prohibited from performing any function in relation to regulated activities – effectively ending their professional involvement in equities trading.
Monitoring and Compliance Made Easy
Issue 67 of the FCA’s Market Watch newsletter provides valuable insight into the regulator’s approach to combatting market manipulation. It spells out the importance of timely and accurate transaction reporting, and exemplifies the penalties that await those firms that fail to properly discharge their responsibilities.
Notably, the volume of STORs filed on a daily basis shows the sizeable reporting burden that weighs on the shoulders of trading venues and firms. As the markets grow and new reporting obligations arise, it follows that many firms are now turning to automated regulatory compliance solutions to manage this burden and safeguard their operations from FCA sanctions.
For more information on how eflow can help you fulfil your regulatory reporting needs, book a demo using the form below.
It was announced this week that eflow has won Best Trade Surveillance Solution for MAD/MAR at the 2021 European RegTech Insight Awards hosted by A-Team Group. Our trade surveillance platform TZ is our flagship product, and we couldn't be happier to see it gaining this...
London-based regulatory compliance firm eflow have today announced that they will be partnering with Euronext in the interest of extending the connectivity of their transaction reporting solution TZTR. As a result of this new partnership, Euronext will provide eflow...
Why Regulators Should Be Promoting RegTech AdoptionDougie Moffat, Business Development ManagerlinkedintwitterAsk anyone on the street whether they know about FinTech and you’re likely to be met with a resounding yes. The same cannot, unfortunately, be said for...
Book a Demo
Pick a service: TZ Trade Surveillance and Regulatory Compliance, or TZTR Transaction Reporting
Pick a date and time
Click ‘Book Demonstration’
Enter your details
You’ll receive a booking confirmation within a few minutes.
A member of our sales team will then contact you with a video conferencing link and calendar invite.