Each year we publish a Market Cleanliness (MC) Statistic for takeover announcements in the UK equity markets. This is defined as the proportion of corporate takeover events for which we observed a significant abnormal movement in share price before the takeover announcement.
The MC statistic for 2022 was 24.6%. This represents an increase over the previous year, though it is difficult to draw meaningful conclusions from year-on-year changes. We therefore now calculate the 5-year moving average of the MC statistic to enable better interpretation; the 5-year moving average for 2022 is at a similar level to previous years.
The MC statistic is one indicator of possible insider dealing, but it has several shortcomings as a measure of broader market cleanliness, especially given the fall in the number of corporate takeover events over the past decade. Episodes of high volatility, after the Russian invasion of Ukraine and other significant economic and political developments throughout the year, could have had an impact on the recent levels of the MC Statistic. Price moves before takeover announcements could have been identified as abnormal during these stress periods but may simply reflect market conditions. Other factors can influence the statistic, such as financial analysts or the media correctly predicting likely takeover targets and this or other factors leading to significant legitimate trades ahead of an announcement. Hence, we also monitor a range of additional indicators.
Each year we publish an Abnormal Trading Volume (ATV) Measure. This looks for abnormal increases in trading volumes ahead of potentially price sensitive announcements, covering equity instruments and some equity derivatives.
The ATV measure for 2022 was 8.4%. This is an increase when compared to 2021, however the period of market stress after the Ukraine Invasion, September budget, and subsequent volatility could have affected the ATV measure. This is based on observing abnormal increases in trading volumes in 273 out of 3238 announcements tested.
The existence of announcements where we have found statistically significant increases in volumes, does not mean that market abuse occurred before each of those announcements, as volumes can fluctuate for a variety of reasons, but it is an indicator that market abuse may have occurred.
We introduced the Potentially Anomalous Trading Ratio (PATR) as part of our work to broaden the number of indicators to help assess market cleanliness.
The new measure looks at potentially anomalous trading that occurs ahead of a price sensitive news announcement. By potentially anomalous trading we mean:
- the participant does not typically trade in this instrument
- the participant traded significantly more in the direction of the announcement
- the participant made a significant profit from trading positions established in the period immediately prior to the announcement
The PATR for 2022 was 4.7% which represents a small decrease from 6.1% in 2021.
It is important to understand this ratio in the context of the overall level of trading considered for this measure. Our analysis revealed 99.5% of trading activity did not occur during a sensitive time period (eg not preceding a potentially price sensitive news announcement where the price did move significantly). For the 0.5% of trading activity that justified further review, only 4.7% of that trading was considered potentially anomalous – a very small percentage of overall UK trading activity.