Market abuse and insider trading have often been depicted through the lens of shadowy TV hedge fund characters, or, simply, bad actors making opportunistic decisions.
Recently though, the Financial Conduct Authority has pointed out that there is far more to this area than simply identifying a rogue trader.
In fact, recent notices from the regulator may point to the increasingly treacherous and shrouded world of criminal enterprises targeting the UK financial services sector.
The Serious Crime Act 2015 defines organised crime groups (OCGs) as a group consisting of three or more persons who act, or agree to act together, to further the purpose of carrying out criminal activities.
The FCA appears to be concerned about these groups. In a February newsletter, Market Watch 77, the FCA warned of indicators that these OCGs may actually form a significant proportion of those individuals committing market abuse, particularly insider trading through UK-regulated firms.
While the FCA continues ramping up their supervisory and enforcement efforts to take assertive action against market abuse, as seen with multiple arrests of OCG members, successful court cases and sentencing linked to market abuse, it has also reminded the market that market abuse covers a wide range of activities.
Market Watch 76, issued shortly before the arrest announcements, appeared to come out of the blue, highlighting concerns around the practices known as ‘flying’ and ‘printing’.
These practices refer to publishing false information about either the price of a financial instrument or volumes of trade orders. These then create a false impression of supply and demand and, ultimately, seek to manipulate the market.
The increase in recent communications focused on market abuse just demonstrates precisely how seriously this is being taken.'Printing' and 'flying', though not terms defined within the FCA handbook, are not new concepts and the FCA raised concerns as far back as November 2018 about these precise items.
Market abuse and the wider aspects of financial crime have long been a foundational area of concern for the FCA, and the increase in recent communications focused on market abuse just demonstrates precisely how seriously this is being taken and perhaps how widespread these actions may be.
The concerns raised in November 2018 prefaced the announcement of an approximate £5mn fine to an interdealer broking firm for market abuse offences. As such, the announcement of the arrests and court cases this time round should be of no surprise.
The core offences under the market abuse regulations, such as insider dealing, unlawful disclosure of inside information, and market manipulation, are well established and, generally speaking, understood by the markets.
However, regulated firms are seemingly being put on notice to review not only how effective their market surveillance and financial crime controls are individually, but to also ensure that these oft-disparate areas are working together to pool data and create an accurate picture of behaviours and patterns.
Risk assessments for regulated firms, while admittedly often somewhat of a static document, form the structural foundation for firms' approaches to mitigation and prevention.
Even when no changes are deemed necessary, these assessments should be reviewed on a consistent basis.
It is clear then that the FCA expects firms to employ a broad overview of potential market abuse.These should take into account not only potential changes to business structures, practices or strategies, but also general market developments and enhancements to an overall monitoring and surveillance programme.
Firms are also increasingly turning to artificial intelligence to bolster their risk management process, whether to enhance predictive analytics to detect potential market manipulation and insider trading activities, or even streamline reporting mechanisms.
This strategic integration of AI within financial systems signifies a broader industry trend, with the FCA also having begun integrating AI into its own surveillance approach.
It is clear then that the FCA expects firms under their supervision to employ a broad overview of potential market abuse.
Firms can better understand risk areas by keeping a comprehensive and up-to-date check on any possible signs of market abuse, refreshing these insights regularly, and utilising comprehensive data analysis.
As the methods and individuals involved in market abuse evolve, moving away from their traditional roots to adopt more sophisticated techniques, firms must adapt swiftly to stay one step ahead.
Failure to do so not only exposes the firm to significant financial and reputational risks but also to the wrath of an increasingly aggressive regulator.
Andrew Poole is a director in the financial services compliance and regulation practice at Kroll
