Locking down market abuse

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Speaker: Mark Steward, Executive Director of Enforcement and Market Oversight
Event: Expert Forum: Market Abuse 2021
Delivered: 25 February 2021
Note: this is the speech as drafted and may differ from the delivered version

Highlights

• Surveillance and investigation work has reduced trading by certain actors whose trading prompted high numbers of suspicious transaction and order reports.
• Increase in the FCA’s proactive market monitoring and the introduction of some new initiatives, notably a new approach to short selling reporting.
• Introduction of a new market cleanliness measure, the Potentially Anomalous Trading Ratio.
• Enforcement action taken in key market abuse cases against individuals and firms.

I am very happy to be able to be here for this year’s virtual webinar and thank the organisers for convening it. Last year’s event feels about 5 years ago. How strangely time has passed since then.

Yet it has also been a very productive time and, I think, the overall picture is one of both strength and resilience as our market stood up to what were unprecedented challenges brought by the pandemic and its impact on the economy.

The immediate policy initiatives we brought in during the first lockdown, including relaxing the approach to urgent capital raisings, the means to obtain shareholder approvals for transactions when required and several other initiatives, all operated well. And our market infrastructure stood up to significant surges in trading volumes, especially during the initial lockdown period.

Volumes and STORs

Despite the coronavirus (Covid-19) pandemic and Brexit, we saw an overall increase of 34% in transactions and transaction reports in 2020. This was largely attributable to heavier trading in the first lockdown period between March and June of last year as investors adjusted to the impact of the pandemic.

We did see a reduction in suspicious transaction and order reports (STORs) during this period. However, this was temporary, and perhaps reflecting a reduction in market abuse opportunities in a pandemic-focussed market as well as new compliance challenges arising from everyone largely working from home.

I should add that, since the first lockdown, STORs have returned to levels we would expect to see, across all asset classes, given the unprecedented trading conditions, although total volumes for the year are lower than previous years. We are not concerned about this. Our surveillance and investigation work over the last couple of years in particular has reduced trading by certain actors whose trading prompted high numbers of STORs. And the STORs we are receiving have remained high quality.

As some of you have heard me say before, our market data processing capabilities continue to be a source of regulatory sunshine, combining transaction reports and the order books to provide us with algorithmic radar across trading in close to real time.

This means we are not wholly dependent on STORs. At the same time, STORs are vital additional sources of information, sending the message that it is not only the regulator that is keeping watch for market abuse, which I think is one of the cardinal features that makes our market work well. So, thank you to all market participants for your valuable contributions during this strange year.

Market Monitoring, Short Positions etc

We also increased our proactive market monitoring during the year given the unusual conditions and we introduced some new initiatives, notably a new approach to short selling reporting which enables short positions to be reported on our Electronic Submission System (ESS) and a new measure for market cleanliness.

The new short position reporting mechanism not only speeds up validation but also introduces automated alerts that enable us to more readily identify delayed notifications or other issues for follow up. We intend to roll this out for long position reporting as well.

This measure was especially timely as it was in place before the first lockdown and gave us much better insight and data than before on short selling positions during the early stage of the pandemic.

The FCA’s approach to short selling, which requires all short positions above 0.1% to be reported to us, and all positions over 0.5% to be disclosed publicly on a daily basis, gives us and the market a very high degree of transparency over short selling positions. The build-up and reduction of positions can be measured.

While here in the UK we did see an overall reduction in the value of net short positions during the Gamestop incident, we have not seen short positions of the size generated in US markets in this incident, nor would such short positions be created without substantial scrutiny by us and the market, as they are built up.

This is the virtue of the transparency regime here in the UK which also facilitates scrutiny and detection of illegal practices like delayed or missing reports and naked shorting. As we know – and I am not commenting on Gamestop – abusive shorting can lead to distortions in a market, especially when there is insufficient cover and inevitable squeeze opportunities arise.

In the context of Gamestop, however, it is relevant, however, to draw attention to the increase in retail trading accounts in the UK during 2020. The trend preceded the lockdown but accelerated during the first lockdown in particular, perhaps fuelled by people spending more time online, more time at home and the increase in so-called commission free trading.

While many of these accounts were opened but appear not to have been used, and new participation in our market is a good thing, there is a risk that new retail investors may become subject to misleading online marketing, as we have seen in the case of online scams and frauds during 2020.

Cleanliness

We also introduced a new market cleanliness measure, the Potentially Anomalous Trading Ratio (PATR), which we published last September. Unlike the Abnormal Trading Volume (ATV) ratio, which we introduced in 2019 and the MC statistics, the PATR is not looking for trading volume fluctuations or price changes ahead of unexpected price sensitive announcements; it focuses, instead, on the underlying trading behaviour around specified price sensitive announcements and assesses whether the behaviour can be deemed anomalous (which is a more neutral term than suspicious though the behaviour may also be suspicious).

The PATR measures the volume of such trades against the total trading volume for the same period. Our first results under PATR produced a figure of 6.7% anomalous trades for 2019 across around 958 price sensitive announcements, which is very close to the ATV metric result for the same period. And as we said in September, that is 6.7% of 0.8% of the total volume of trades in the market.

In time and as a trend, another market cleanliness measure might also be the reduction in the incidence of alerts generated by our own algorithms as well as a reduction in STORs, assuming no other intervening factors might explain such phenomenon and our systems and controls for detection remain as sensitively calibrated as possible.

Tackling market abuse ensures the mechanisms for efficient and reliable value and price, for genuine supply and demand, continue to work well and this is integral to ensuring our capital markets offer the highest levels of protection for global capital.

We will continue to look for measures that are meaningful and allow us to assess trends over time.

Enforcement

On the enforcement front, it has also been busy and productive. Some highlights are below.

• We publicly censured Redcentric and secured a compensation agreement for members who were impacted by false and misleading statements about the company’s financial position. This was the first time an AIM listed company implemented a scheme to compensate its members for market abuse. We also brought criminal charges arising from the same circumstances against 3 former directors alleging offences under the Companies Act, Theft Act and Fraud Act. Those charges await trial.
• We also issued public censure proceedings against Carillion following its £7billion collapse, alleging market abuse by the company. This investigation is one of the FCA’s largest and most significant. We also issued regulatory proceedings against 3 former directors of the company alleging market abuse in relation to false statements and failures to take reasonable steps to ensure announcements were not misleading. We are seeking the imposition of sanctions. These proceedings are on foot.
• We completed market abuse proceedings against former hedge fund manager, Corrado Abbatista, and fined him £100,000 for placing large misleading orders for instruments he had no intention of trading whilst at the same time placing smaller genuine orders on the opposite side of the order book. We found he falsely represented an intention to buy or sell when his true intention was different, distorting the appearance of genuine supply and demand, and illegally benefiting his trading position.
• We brought proceedings against HK based hedge fund, Asia Research & Capital Management Ltd, and fined it £873,000 for failures to make 155 notifications to the FCA and 155 disclosures to the market, over more than 100 days, of its net short position in Premier Oil Plc which constituted nearly 17% of the company’s issued share capital.
• We have recently commenced insider dealing proceedings against 4 individual defendants in 2 separate proceedings. In one case we allege the 2 defendants committed insider dealing offences in relation to trading in British Polythene Industries Plc. In the second we allege 2 brothers, formerly of Goldman Sachs and Clifford Chance, committed insider dealing offences in 6 stocks. Those cases are also awaiting trial.
• Finally, just before Christmas we won the appeal against conviction and sentence brought by Fabiana Abdel-Malek and Walid Choucair. This is one of the most complex insider dealing cases I have ever encountered, not because of the trading, but because of the extraordinary challenges to the evidence by the defendants and cross allegations against the investigation, all of which were rejected by the Court of Appeal. Following this decision, Mr Choucair, who was sentenced to 3 years imprisonment, was ordered to pay over the sum of £3.9 million under the Proceeds of Crime Act proceedings brought by the FCA. The sum represented profits arising from the transactions in issue in the trial together with trading in other stocks which the court was entitled to assume represented other insider trading profits. As they say, crime really doesn’t pay.

I’ve managed to get to the end of what I wanted to say without mentioning Brexit which was the other significant factor in our work over the last 12 months. I will not say much now that the transition period has ended other than to mention the enormous work involved in ensuring a smooth transition in the weeks and days leading up to 31 December by colleagues and market participants. It has brought a new beginning and we are now in a new world with new challenges and, no doubt, new opportunities.