Newsletter on market conduct and transaction reporting issues.
About this edition
In this Market Watch, we discuss how we use orderbook data to help conduct surveillance to identify suspected market manipulation, and share some outcomes resulting from this work.
To identify suspected market manipulation, we use suspicious transaction and order reports (STORs) and other notifications about suspected market abuse under article 16 of the Market Abuse Regulation (UK MAR).
We also undertake our own surveillance of market activity, for example using orderbook data provided by UK trading venues.
We review all STORs and other notifications received and determine the most appropriate action. Although some result in enforcement outcomes, many outcomes are not public. We intend to share outcome case studies in Market Watch, including more non-enforcement outcomes.
Our aim is to help firms and trading venues in ensuring that they identify, report and, where applicable, prevent potential misconduct appropriately. We also aim to ensure that individuals, particularly those working for FCA authorised firms, understand the full range of consequences of engaging in inappropriate conduct.
Identifying equity manipulation
Since 2017, we have required key UK equity trading venues to provide us with their order book records and we have developed an automated process for ingesting this data.
We receive approximately 150m order book messages per day and ‘blend’ the data into a single holistic view of market activity. This work is conducted by a dedicated technology team.
This consolidated ‘helicopter’ view allows us to detect manipulative trading using a suite of proprietary algorithms which is run across the data set. These surveillance algorithms look for a range of manipulative trading strategies including, but not limited to, ‘spoofing and layering’, ‘marking the close’, ‘ramping’, ‘reference price gaming’ and ‘wash trading’.
Additionally, this systematically ingested data is used to help review STORs and other notifications that we receive from trading venues, market participants and members of the public and to support other regulatory functions.
In Market Watch 59, we highlighted that inaccurate reporting by firms when mapping ‘short-to long’ client codes for orderbook activity could result in incorrect data being stored by trading venues.
This may limit our ability to undertake effective market abuse surveillance. Member firms and trading venues should ensure that their systems for use of ‘short’ and ‘long’ client codes are adequate for these purposes.
At present we only systematically ingest orderbook data for equity markets. But this does not mean that we do not cover orderbook activity and potential manipulative trading for other asset classes.
We assess the controls of all trading venues and firms to ensure that they have effective surveillance arrangements and report suspicious activity to us as required. We also make information requests for orderbook data to support our enquiries.
Firms and trading venues should maintain good records of their orderbook data to meet their obligations and help us with this work.
Through our internal surveillance arrangements, the requirements on, and our supervisory work with, trading venues and firms we are able to ensure we continually deliver against our objective to protect and enhance the integrity of the markets across various asset classes.
When we identify potential manipulative trading, whether by our own surveillance or reported to us by other parties, we make further enquiries. This can result in various outcomes including formal investigation using enforcement powers or other non-enforcement outcomes. Recent examples are:
Addressing potentially poorly designed algorithms
Our internal surveillance algorithms identified trading by an algorithmic trading firm which raised potential concerns about the impact the algorithms responsible for executing the firm’s different trading strategies were having on the market. As a result of our enquiries, the firm adjusted the relevant algorithm and its control framework to help avoid the firm’s activity having an undue influence on the market.
Addressing staff conduct
Our internal surveillance algorithms identified a small number of instances of potential ‘spoofing’ by a trader at a firm. As a result of our subsequent enquiries the firm introduced additional market abuse training for all its trading staff and enhanced its surveillance capabilities to help better identify this type of activity.
Corrado Abbattista Final Notice
The trading which resulted in the Final Notice being issued to Mr Corrado Abbattista, the former CIO of a hedge fund, on 15 December 2020 was identified by our internal surveillance algorithms.
The Final Notice sets out the reasons for our actions. On multiple occasions, between 20 January and 15 May 2017 Mr Abbattista placed large, misleading orders for Contracts for Difference (CFDs), referenced to the shares of various companies, which he did not intend to execute.
At the same time, he placed smaller orders that he did intend to execute on the opposite side of the order book to the large, misleading orders. Through his large misleading orders, Mr Abbattista falsely represented to the market an intention to buy/sell when his true intention was the opposite.
At the same time, his misleading orders were for volumes of shares far greater than the typical market size, which would also have created a false and misleading impression regarding the true supply of and demand for the shares.
Adrian Horn Final Notice
Between 18 July 2018 and 22 May 2019, Mr Horn executed 129 wash trades in the shares of McKay Securities Plc (“McKay”), intentionally placing buy orders in the shares that traded with his existing sell orders (and vice versa).
Mr Horn entered orders into the market in such a way as to try and avoid anyone detecting that he was wash trading.
Mr Horn’s motive for executing the wash trades was to ensure that a minimum number of shares were traded in McKay each day, which he believed was a requirement to ensure that McKay remained in the FTSE All Share Index.
Mr Horn thought that by helping McKay to remain in the FTSE All Share Index he would benefit the relationship between his employer and its client, McKay.
Through his wash trading Mr Horn gave false and misleading signals to the market as to demand for and supply of McKay shares. His actions resulted in other market participants seeing what they believed to be legitimate trades in McKay. In addition, the wash trades artificially inflated end of day trading volumes reported to the market.
Trading manipulation in other asset classes
Our work to combat market manipulation is not restricted to equity markets. For instance, we followed up reports about suspected spoofing in European Government Bond Futures by an individual employed as a European Government Bond Market Maker and Primary Dealer at a major UK authorised investment bank.
On a limited number of occasions, this individual placed large orders on one side of the book apparently to facilitate the execution of smaller orders placed in the opposite direction. The large orders did not trade and were deleted within a few seconds.
The individual was investigated by his employer and dismissed for gross misconduct after being found to have breached a number of its internal policies.