Market Abuse and Insider Trading: Introduction to Market Abuse

Posted in Markets Compliance on March 4, 2024
Market Abuse

The Market Abuse Regulation, or MAR, came into force on the 3rd of July 2016. It reversed the previous Market Abuse Directive or MAD, replacing it with the extended scope and expanded civil market abuse regime across the EU. It aims to increase market integrity and investor protection while enhancing the appeal of securities markets for capital raising.

Market Abuse

Market Abuse Regulation Categories

The following categories of behavior are defined as market abuse in the Market Abuse Regulation:

  • Insider Dealing: Inside information is improperly used or attempted to be used by an insider, including using inside information to amend or cancel an order.
  • Unlawful Disclosure: An insider unlawfully discloses inside information to another person, including encouraging someone to transact based on said information.
  • Market Manipulation: Gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument, a related spot commodity contract, or an auctioned product based on emission allowances.

Market abuse applies to the following financial instruments:

  • Admitted to trading on a regulated market or for which a request for admission to trading on a regulated market has been made.
  • Traded on a Multilateral Trading Facility, or MTF, admitted to trading on an MTF, or for which a request for admission to trading on an MTF has been made.
  • Traded on an Organized Trading Facility, or OTF.
  • This behavior occurs when an insider deals, attempts to deal or refrains from dealing based on inside information related to the investment in question. 

Inside information is:

  • Information of a precise nature that has not been made public;
  • Relates directly or indirectly to one or more issuers or one or more financial instruments; and 
  • If made public, it would likely have a significant effect on those financial instruments’ prices or related derivative financial instruments. Information that is considered precise is information that indicates a set of circumstances that exist or which may be reasonably expected to come into existence or an event that has occurred or may occur and is specific enough to permit the drawing of conclusions as to the possible effect of that set of circumstances or event on the prices of the financial instruments or the related derivative financial instrument in question.

The information will likely have a significant effect on price if it is information that a reasonable investor would likely use as part of the basis of their investment decisions.

Market Abuse

Behavior typical of insider dealing includes:

  • Dealing based on inside information;
  • Front running is when a transaction is undertaken for a person’s benefit based on and ahead of an order that he is to carry out with or for another in respect of which information concerning the order is inside information, which takes advantage of the anticipated impact of the order on market price;
  • In the context of a takeover, an offeror or potential offeror enters into a transaction based on inside information concerning the proposed bid that provides economic exposure to movements in the price of the target company’s shares, such as a spread bet, for example; and
  • In the context of a takeover, a person who acts for the offeror or potential offeror deals for his benefit in a qualifying investment or related investment based on information concerning the proposed bid, which is inside information.

A person may come into possession of inside information in the following ways:

  • Having such information disclosed to them, whether unlawfully or otherwise;
  • Being aware of a potential placement, deal, or similar activity that involves listed instruments and has yet to be disclosed publicly;
  • Being aware of profits or losses in a client’s account which are yet to be publicly disclosed and may impact their own or a related company’s share price; or
  • Being aware of clients’ pending orders.

Working in the financial sector can be considerably challenging. Many professionals have access to inside information and frequently use this information to make a profit. After the 2008 crisis, regulators worldwide put much effort into monitoring and detecting insiders. Currently, there are a lot of automated systems to monitor emails and telephone conversations and any suspicious transactions that may arise on the market. As a result, regulated companies must provide adequate systems and controls to prevent insider dealing and report any suspicions to local authorities.

What is Unlawful Disclosure?

Unlawful disclosure refers to revealing inside information to a third party without following the proper processes and procedures for disseminating such information, except where the disclosure is made in the normal exercise of employment, a profession, or duties. To prevent unlawful disclosure, MAR mandates using insider lists which help track who has or had access to inside information at a specific moment.

Professionals are prohibited from making unlawful disclosures and must obtain prior approval from the Head of Compliance or Money Laundering Reporting Officer before disclosing inside information. 

Acquisitions, financial results, a new board or executive positions, or any information that could significantly influence a company’s share price are examples of this information.

Market Abuse

What is Market Manipulation? 

Market manipulation refers to artificial inflation or deflation of the price of a security. It is also known as price or stock manipulation, which involves the literal manipulation of a financial market for personal gain. It means influencing the behavior of the securities with the intent to do so.

Market manipulation comprises four broad activities:

  • Manipulating transactions;
  • Manipulating devices;
  • Disseminating manipulative information; or
  • Any other form of misleading or distortive behavior.

A manipulating transaction is one where a person enters into a transaction, places an order to trade, or conducts any other behavior which:

  • Gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of a financial instrument; or
  • Secures, or is likely to secure, the price of one or more financial instruments at an abnormal or artificial level.

Among the examples of manipulating transactions are those seeking to give false and misleading impressions: 

  • Banging the close: Buying or selling investments at the market close, with the effect of misleading investors, who act based on closing prices, unless undertaken for legitimate reasons.
  • Wash trading: The sale or purchase of an investment where there is no change in beneficial interest or market risk or between parties acting in collusion, unless for legitimate reasons.
  • Painting the tape: Entering into a series of transactions shown to the market to give the impression of trading activity or price movement.
  • Spoofing: Entering orders on an electronic order system at higher or lower prices than the previous bid or offer and withdrawing them before they are executed to give the false impression that demand for or supply of the investment exists at those prices.
  • Quote Stuffing: Involves quickly entering and withdrawing a large number of orders to flood the market and create uncertainty for other participants.
  • Momentum ignition: Entering a sequence of trades to start or exacerbate a trend to create an opportunity to later unwind the position at a favorable price.
  • Price positioning: For example, plotting with others to control supply or demand for investment, abusive squeezes, or trading on one market or trading platform to improperly influence the price on another of the same or related investment.

Manipulating devices happen when someone enters into a transaction, places an order to trade, or engages in any other activity that affects the price of one or several financial instruments and includes using a fictitious device or artificial means.

Information disseminated through radio, television, the internet, or any other media which gives, or is likely to give, false or misleading signals as to the demand for, supply of, or price of any financial instrument, or which is likely to secure, such a price at an abnormal or artificial level is considered to be manipulation of information. This offense also includes the dissemination of rumors, where the person who made the dissemination knew, or ought to have known, that the information was false or misleading.

Final Thoughts

This is an intentional attempt to interfere with the pricing of a share or the operation of a market in which such a share is traded. It may create an artificial, false, or misleading impression of the price, prompting others to react and potentially disadvantage others through such behaviour. Insider trading, unlawful disclosure of inside information, and market manipulation are all prohibited under the Market Abuse Regulation. It has a significant extraterritorial impact and applies to a wide range of instruments listed or traded on various platforms.