MAR 1.6 Market abuse (manipulating transactions)

The following behaviours are, in the opinion of the FSA , market abuse (manipulating transactions) of a type involving false or misleading impressions:

1. (1)

   buying or sellingqualifying investments at the close of the market with the effect of misleading investors who act on the basis of closing prices, other than for legitimate reasons;

   [Note: Article 1.2(c) Market Abuse Directive]

2. (2)

   wash trades - that is, a sale or purchase of a qualifying investment where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion, other than for legitimate reasons;

3. (3)

   painting the tape - that is, entering into a series of transactions that are shown on a public display for the purpose of giving the impression of activity or price movement in a qualifying investment; and

4. (4)

   entering orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer, and withdrawing them before they are executed, in order to give a misleading impression that there is demand for or supply of the qualifying investment at that price.

The following behaviours are, in the opinion of the FSA , market abuse (manipulating transactions) involving securing the price of a qualifying investment:

1. (1)

   transactions or orders to trade by a person, or persons acting in collusion, that secure a dominant position over the supply of or demand for a qualifying investment and which have the effect of fixing, directly or indirectly, purchase or sale prices or creating other unfair trading conditions, other than for legitimate reasons;

   [Note: Article 1.2(c) Market Abuse Directive]

2. (2)

   transactions where both buy and sell orders are entered at, or nearly at, the same time, with the same price and quantity by the same party, or different but colluding parties, other than for legitimate reasons, unless the transactions are legitimate trades carried out in accordance with the rules of the relevant trading platform (such as crossing trades);

3. (3)

   entering small orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer, in order to move the price of the qualifying investment, other than for legitimate reasons;

4. (4)

   an abusive squeeze - that is, a situation in which a person:

   1. (a)

      has a significant influence over the supply of, or demand for, or delivery mechanisms for a qualifying investment or related investment or the underlying product of a derivative contract;

   2. (b)

      has a position (directly or indirectly) in an investment under which quantities of the qualifying investment, related investment, or product in question are deliverable; and

   3. (c)

      engages in behaviour with the purpose of positioning at a distorted level the price at which others have to deliver, take delivery or defer delivery to satisfy their obligations in relation to a qualifying investment (the purpose need not be the sole purpose of entering into the transaction or transactions, but must be an actuating purpose);

5. (5)

   parties, who have been allocated qualifying investments in a primary offering, colluding to purchase further tranches of those qualifying investments when trading begins, in order to force the price of the qualifying investments to an artificial level and generate interest from other investors, and then sell the qualifying investments;

6. (6)

   transactions or orders to trade employed so as to create obstacles to the price falling below a certain level, in order to avoid negative consequences for the issuer, for example a downgrading of its credit rating; and

7. (7)

   trading on one market or trading platform with a view to improperly influencing the price of the same or a related qualifying investment that is traded on another prescribed market.

In the opinion of the FSA the following factors are to be taken into account when considering whether behaviour is for "legitimate reasons", and are indications that it is not:

1. (1)

   if the person has an actuating purpose behind the transaction to induce others to trade in, or to position or move the price of, a qualifying investment;

2. (2)

   if the person has another, illegitimate, reason behind the transactions or order to trade;

   [Note: Recital 20 Market Abuse Directive]

3. (3)

   if the transaction was executed in a particular way with the purpose of creating a false or misleading impression.

In the opinion of the FSA the following factors are to be taken into account when considering whether behaviour is for "legitimate reasons", and are indications that it is:

1. (1)

   if the transaction is pursuant to a prior legal or regulatory obligation owed to a third party;

2. (2)

   if the transaction is executed in a way which takes into account the need for the market as a whole to operate fairly and efficiently;

3. (3)

   the extent to which the transaction generally opens a new position, so creating an exposure to market risk, rather than closes out a position and so removes market risk; and

4. (4)

   if the transaction complied with the rules of the relevant prescribed markets about how transactions are to be executed in a proper way (for example, rules on reporting and executing cross-transactions).

In the opinion of the FSA, the following factors are to be taken into account in determining whether or not a person's behaviour amounts to market abuse (manipulating transactions): [Note: Article 4 2003/124/EC]

1. (1)

   the extent to which orders to trade given or transactions undertaken represent a significant proportion of the daily volume of transactions in the relevant qualifying investment on the regulated market concerned, in particular when these activities lead to a significant change in the price of the qualifying investment;

2. (2)

   the extent to which orders to trade given or transactions undertaken by persons with a significant buying or selling position in a qualifying investment lead to significant changes in the price of the qualifying investment or related derivative or underlying asset admitted to trading on a regulated market;

3. (3)

   whether transactions undertaken lead to no change in beneficial ownership of a qualifying investment admitted to trading on a regulated market;

4. (4)

   the extent to which orders to trade given or transactions undertaken include position reversals in a short period and represent a significant proportion of the daily volume of transactions in the relevant qualifying investment on the regulated market concerned, and might be associated with significant changes in the price of a qualifying investment admitted to trading on a regulated market;

5. (5)

   the extent to which orders to trade given or transactions undertaken are concentrated within a short time span in the trading session and lead to a price change which is subsequently reversed;

6. (6)

   the extent to which orders to trade given change the representation of the best bid or offer prices in a financial instrument admitted to trading on a regulated market, or more generally the representation of the order book available to market participants, and are removed before they are executed; and

7. (7)

   the extent to which orders to trade are given or transactions are undertaken at or around a specific time when reference prices, settlement prices and valuations are calculated and lead to price changes which have an effect on such prices and valuations.

In the opinion of the FSA , the following factors are to be taken into account in determining whether or not a person's behaviour amounts to market abuse (manipulating transactions):

1. (1)

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

2. (2)

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

3. (3)

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

In the opinion of the FSA , the following factors are to be taken into account when determining whether a person has engaged in an abusive squeeze:

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; for example, behaviour is less likely to amount to an abusive squeeze if a person is willing to lend the investment in question;

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 an abusive squeeze has been effected;

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 an abusive squeeze has been effected; 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 are accepted by the FSA as accepted market practices for the purposes of market abuse (manipulating transactions):

1. (1)

   The practices set out in the London Metal Exchange's document "Market Aberrations: The Way Forward" published in October 1998 which govern the behaviour expected of long position holders (see MAR 1 Annex 2 G).

The following are examples of behaviour that may amount to market abuse (manipulating transactions):

1. (1)

   a trader simultaneously buys and sells the same qualifying investment (that is, trades with himself) to give the appearance of a legitimate transfer of title or risk (or both) at a price outside the normal trading range for the qualifying investment . The price of the qualifying investment is relevant to the calculation of the settlement value of an option. He does this while holding a position in the option . His purpose is to position the price of the qualifying investment at a false, misleading, abnormal or artificial level, making him a profit or avoiding a loss from the option ;

2. (2)

   a trader buys a large volume of commodity futures, which are qualifying investments, (whose price will be relevant to the calculation of the settlement value of a derivatives position he holds) just before the close of trading. His purpose is to position the price of the commodity futures at a false, misleading, abnormal or artificial level so as to make a profit from his derivatives position;

3. (3)

   a trader holds a short position that will show a profit if a particular qualifying investment, which is currently a component of an index, falls out of that index. The question of whether the qualifying investment will fall out of the index depends on the closing price of the qualifying investment. He places a large sell order in this qualifying investment just before the close of trading. His purpose is to position the price of the qualifying investment at a false, misleading, abnormal or artificial level so that the qualifying investment will drop out of the index so as to make a profit; and

4. (4)

   a fund manager's quarterly performance will improve if the valuation of his portfolio at the end of the quarter in question is higher rather than lower. He places a large order to buy relatively illiquid shares, which are also components of his portfolio, to be executed at or just before the close. His purpose is to position the price of the shares at a false, misleading, abnormal or artificial level.

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 from his original position.