MAR 1.6 Distortion

In order to fall within the distortion test:

1. (1)

   the behaviour must be such that a regular user would, or would be likely to, regard it as behaviour which would, or would be likely to, distort the market in the investment in question. Behaviour will amount to market abuse if the behaviour engaged in interferes with the proper operation of market forces with the purpose of positioning prices at a distorted level. This need not be the sole purpose of entering into the transaction or transactions, but must be an actuating purpose; and

2. (2)

   in order to be likely, there must be a real and not fanciful likelihood that the behaviour will have such an effect, although the effect need not be more likely than not. The behaviour may, or may be likely to, give rise to more than one effect, including the effect in question.

It is unlikely that the behaviour of market users when trading at times and in sizes most beneficial to them (whether for the purpose of long term investment objectives, risk management or short term speculation) and seeking the maximum profit from their dealings will of itself amount to distortion. Such behaviour, generally speaking, improves the liquidity and efficiency of markets.

It is unlikely that prices in the market which are trading outside their normal range will necessarily be indicative that someone has engaged in behaviour with the purpose of positioning prices at a distorted level. High or low prices relative to a trading range can be the result of the proper interplay of supply and demand.

Behaviour will constitute market abuse where a person enters into a transaction, or a series of transactions, with the purpose of positioning the price of a qualifying investment or relevant product at a distorted level (the purpose need not be the sole purpose for entering into the transaction or transactions, but must be an actuating purpose).

It follows that behaviour which incorporates a purpose of positioning the price at a distorted level cannot have a legitimate commercial rationale. The Code does not restrict market users trading significant volumes where there is a legitimate purpose for the transaction (for example, index tracking which can involve trading significant volumes on the close) and where the transaction is executed in a proper way, that is, a way which takes into account the need for the market as a whole to operate fairly and efficiently. In most cases the rules of prescribed markets include a requirement that transactions be executed in a proper way (for example, rules on reporting and executing cross-trades). Such behaviour is unlikely to distort the market in the investments in question, even if it causes the market to move. But trading significant volumes with the purpose of controlling the price of a qualifying investment or a relevant product and positioning it at a distorted level will amount to market abuse.

The following factors will be taken into account when determining whether a person has positioned the price of a qualifying investment or relevant product at a distorted level, although the presence of one or more of these factors does not automatically mean the market has been distorted:

1. (1)

   the extent to which the timing of the person's transaction or transactions coincided with a time at or around which the price of the qualifying investment or relevant product was relevant (whether for the market as a whole and or the person in question) to the calculation of reference prices, settlement prices, and valuations (for example, close of trading, end of quarter);

2. (2)

   the extent to which the person had a direct or indirect interest in the price or value of the qualifying investment or relevant product;

3. (3)

   the volume or size of the person's transaction or transactions in relation to reasonable expectations of the depth and liquidity of the market at the time in question;

4. (4)

   the extent to which price, rate or option volatility movements, and the volatility of these factors for the investment in question occur which are outside their normal intra-day, daily, weekly or monthly range;

5. (5)

   the extent to which the person's transaction or transactions caused the market price of the investment to increase or decrease, following which the market price returned immediately to its previous level; and

6. (6)

   whether a person has successively and consistently increased or decreased his bid, offer or the price he has paid for a qualifying investment or relevant product.

Squeezes occur relatively frequently when the proper interaction of supply and demand leads to market tightness, but this is not of itself abusive. In addition, having a significant influence over the supply of, or demand for, or delivery mechanisms for an investment, for example, through ownership, borrowing or reserving the investment in question, is not of itself abusive.

An abusive squeeze occurs where a person has satisfied the conditions in MAR 1.6.13 G, which include positioning the price at a level materially different than the price that would have been determined by the interaction of proper supply and demand at which others have to deliver, take delivery or defer delivery to satisfy their obligations. Abusive squeezes damage liquidity and confidence in prescribed markets on a multilateral, not just a bilateral, basis and damage confidence in the delivery mechanisms of prescribed markets.

The following factors will be taken into account when determining whether a person has engaged in an abusive squeeze. These factors do not impose new obligations on market users. For example, they do not impose an obligation to lend to others where one does not already exist, although behaviour is less likely to amount to an abusive squeeze if a person is willing to lend the investment in question. The factors are as follows:

1. (1)

   the extent to which a person is willing to relax his control or other influence in order to help maintain an orderly market, and the price at which he is willing to do so;

2. (2)

   the extent to which the person's activity causes, or risks causing, settlement default by other market users on a multilateral basis and not just a bilateral basis. The more widespread the risk of multilateral settlement default, the more likely that the market has been distorted;

3. (3)

   the extent to which prices under the delivery mechanisms of the market diverge from the prices for delivery of the investment or its equivalent outside those mechanisms. The greater the divergence beyond that to be reasonably expected, the more likely that the market has been distorted; and

4. (4)

   the extent to which the spot or immediate market compared to the forward market is unusually expensive or inexpensive or the extent to which borrowing rates are unusually expensive or inexpensive.

The following is an example of an abusive squeeze. A trader with a long position in bond futuresbuys or borrows a large amount of the cheapest to deliver bonds and either refuses to re-lend these bonds or will only lend them to parties he believes will not re-lend to the market. His purpose is to position the price at which those with short positions have to deliver to satisfy their obligations at a materially higher level, making him a profit.