The Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine Swift Trade, a non-FSA authorised Canadian company with global operations, £8m for market abuse. The Tribunal described this as being “as serious a case of market abuse of its kind as might be imagined”.
Between 1 January 2007 and 4 January 2008, Swift Trade engaged in a systematic and deliberate form of manipulative trading known as “layering”. The manipulative trading caused a succession of small price movements in a wide range of individual shares on the London Stock Exchange (LSE) from which Swift Trade made substantial profits.
The trading was widespread and repeated on many occasions involving tens of thousands of orders by many individual traders sometimes acting in concert with each other across many locations worldwide. The trading led to a false or misleading impression of supply and demand and an artificial share price in the shares they traded which was to the detriment of other market participants. The FSA believes that such conduct, if unchecked, could undermine market confidence.
Further, in March 2007, when Swift Trade became aware that the LSE had raised concerns about its trading activity it actively sought to evade restrictions on its trading by refining its trading pattern to avoid detection. Swift Trade said it would impose effective controls on its trading but, in fact, took further steps to avoid regulatory scrutiny by changing its Direct Market Access (DMA) provider. DMA is a service offered by some stockbrokers who are exchange member firms that enables investors to place buy and sell orders directly on the order book.
The Tribunal concluded that the FSA had proved its case that Swift Trade had engaged in layering activity which constituted market abuse. It concluded that the trading was deliberate, manipulative and designed to deceive other market users and that Swift Trade was successful in that aim. The Tribunal described Swift Trade’s conduct as a cynical course of intensive manipulation of the LSE which was designed to conceal what it was doing from regulators and to escape the consequences of its actions.
Swift Trade argued that its trading was not market abuse because its orders were not in shares but in derivatives (CFDs or swaps) which were hedged in corresponding orders in shares on the LSE. The Tribunal dismissed this argument as contrary to common sense and market practice, and was satisfied that the derivative orders were placed in the knowledge and expectation that the DMA providers would immediately and automatically match them with hedging orders in shares.
Swift Trade also argued that it was not responsible for the activities of traders in its network and that the traders made their own trading decisions. The Tribunal accepted the FSA’s case that the traders were acting as part of the Swift Trade organisation and in accordance with a strategy of which Swift Trade was not only well aware but which it devised and encouraged.
The Tribunal rejected Swift Trade’s argument that it had, or could reasonably have thought that it had, grounds for believing that its conduct was not abusive, which could have led to a defence under s.123(2) FSMA. The Tribunal concluded that the evidence pointed very much to the conclusion that Swift Trade’s officers and managers knew very well that its conduct was not legitimate and that, far from taking steps to prevent such conduct, they actively encouraged it.
Peter Beck, the President and CEO of Swift Trade, also challenged the FSA’s decision on the basis that he was prejudicially identified in the Decision Notice. The Tribunal dismissed his reference, noting that Mr Beck’s interests did not differ materially from those of Swift Trade.
Tracey McDermott, FSA director of enforcement and financial crime said:
“We are pleased that the Tribunal has upheld the FSA’s decision and accepted unreservedly the evidence from our witnesses and experts as to the nature and impact of the activity. This was a particularly cynical case where a business model was based on market abuse. The approach taken by Swift Trade was novel and complex, designed to allow them to benefit at the expense of other market users, and to make detection more difficult. The FSA is committed to taking whatever steps are necessary to protect the integrity of our markets whatever the techniques used and wherever the perpetrators are located.
“We urge other market participants to take note of this judgment which makes it clear that layering is abusive. We expect brokers and DMA providers to ensure that their clients implement appropriate controls to monitor their clients’ trading activity closely to ensure that it is not abusive, and to report suspicious transactions.”
This was a significant investigation and, in particular, the FSA would like to thank the LSE and other regulators in Canada and the United States for their co-operation.
Notes for editors
- A copy of the Decision of the Upper Tribunal dated 23 January 2013 can be seen on the Tribunal’s website.
- The FSA published its Decision Notice against Swift Trade on 31 August 2011. The Decision Notice contains graphs showing examples of the layering activity.
- This is the largest fine the FSA have ever issued against a firm for market manipulation. The highest penalty for market abuse (£17 million) was imposed on Shell in August 2004.
- Layering involves entering relatively large orders on one side of the LSE order book, which has the effect of moving the share price as the market adjusts to the fact that there has been an apparent shift in the balance of supply and demand. This is then followed by a trade on the opposite side of the order book which takes advantage of, and profits from, the share price movement. This is in turn followed by a rapid deletion of the large orders which have been entered in order to cause the movement in price, and by a repetition of this behaviour in reverse on the other side of the order book. Swift Trade placed the large orders in order to give a false and misleading impression of supply and demand. The large orders were not intended to be traded. They were carefully placed close enough to the touch price (i.e. the best bid and offer prevailing in the market at the time) to give a false and misleading impression of supply and demand, but far enough away to minimise the risk that they would be traded. The trading activity caused many individual share prices to be positioned at an artificial level, from which Swift Trade profited directly.
- Swift Trade, its affiliate Biremis Corp, Peter Beck and others have recently agreed settlements with the Ontario Securities Commission, the Securities Exchange Commission and the Financial Industry Regulatory Authority.
- Swift Trade Inc was dissolved in December 2010 and its assets were transferred to its holding company, BRMS Holdings Inc. The Canadian law provisions concerning the dissolution provided that the FSA’s proceedings could continue as if the company had not been dissolved.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
- The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013 as required by the Financial Services Act 2012.