2 2 Market Manipulation
2-1 Introduction(1) Section 92(4) of the FSMR provides that market manipulation amounts to:
Behaviour [consisting] of effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with Accepted Market Practices on the relevant market) which -(a)give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more Financial Instruments; or(b) secure the price of one or more such Instruments at an abnormal or artificial level.(2) The following Rules of this chapter set out the Regulator's views on conduct that contravenes paragraphs (a) and (b) of Section 92(4).
2-2 Market Manipulation(1) This Rule sets out examples of conduct that, in the Regulator's view, may contravene sections 92(4)(a) and (b) and factors that the Regulator may take into account in considering whether conduct contravenes those Articles.
Examples of market manipulation(2) The following are general examples of conduct that, in the Regulator's view, may result in or contribute to a false or misleading impression under sections 92(4)(a):(a) buying or selling Financial Instruments at the close of the market with the effect of misleading investors who act on the basis of closing prices;(b) entering orders with a view to creating a false perception of demand or supply;(c) wash trades — that is, a sale or purchase of a Financial Instrument 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 collusion, resulting in a false appearance of trading activity;(d) painting the tape — that is, entering into a transaction or series of transactions in relation to a Financial Instrument which are shown on a public display to give the impression of activity or price movement in the Financial Instrument;(e) layering — that is, submitting multiple orders in relation to a Financial Instrument away from one side of the order book with the intention of executing a trade on the other side of the order book, where once that trade has taken place, the initial manipulative orders will be removed;(f) momentum ignition — that is, entering orders or a series of orders in relation to a Financial Instrument that are intended to start or exacerbate a trend, and to encourage other participants to accelerate or extend the trend in order to create an opportunity to unwind/open a position at a favourable price; and(g) quote stuffing — that is, entering large numbers of orders and/or cancellations/updates to orders in relation to a Financial Instrument to create uncertainty for other market participants, slow down their trading processes, camouflage the person's own strategy, disrupt or delay the functioning of the trading process and/or make it more difficult to identify genuine orders on the trading system.While some of the above examples are more commonly associated with algorithmic trading, such as high frequency trading, in the Regulator's view, the conduct could amount to Market Abuse whether it occurs using automated systems or manually.(3) The following are general examples of conduct that, in the Regulator's view, may create or may be likely to create an artificial price for a Financial Instrument under sections 92(4)(b):(a) marking the open/marking the close — that is, buying or selling a Financial Instrument near the reference time of the trading session (e.g. at opening or closing time) or at the end of a particular period (e.g. at the end of the quarter or a financial year) in order to increase, decrease, maintain or mislead investors as to the reference price (e.g. opening price or closing price);(b) transactions where both buy and sell orders for a Financial Instrument are entered at, or nearly at, the same time, with the same price and quantity by the same party, or by parties acting in collusion, in order to position the price of the Financial Instrument at a particular level;(c) 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 Financial Instrument or the underlying Financial Instrument or commodity and which have the effect of fixing, directly or indirectly, purchase or sale prices or creating other unfair trading conditions;(d) an abusive squeeze — that is, when a person:(i) who has a significant influence over the supply of, or demand for, or delivery mechanisms for a Financial Instrument or the underlying product of a Derivative; and(ii) has a position (directly or indirectly) in a Financial Instrument under which quantities of the Financial Instrument, or product in question are deliverable,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 Financial Instrument, where this purpose is an actuating purpose and not necessarily the sole purpose of entering into the transaction or transactions;(e) colluding in the after-market of an initial public Offer - that is, parties, who have been allocated Financial Instruments in a primary Offering, collude to purchase further tranches of those Financial Instruments when trading begins, in order to force the price of the Financial Instrument to an artificial level and generate interest from other investors, and then sell the Financial Instruments;(f) creating a floor (or ceiling) in the price pattern - that is, transactions or orders to trade carried out in such a way as to create obstacles to the price of a Financial Instrument falling below or rising above a certain level; for example, to avoid negative consequences for an Issuer, such as the downgrading of the Issuer's credit rating or to ensure that a Derivative settlement price is above a certain strike price; and(g) entering into transactions or placing orders in relation to a Financial Instrument on one exchange in order to influence improperly the price of a Related Instrument on that exchange or the price of the same Financial Instrument or a Related Instrument on another exchange.(4) The following are some more specific examples of conduct that, in the Regulator's view, may contravene sections 92(4)(a) or (b):(a) A, a trader, accumulates a large position in Commodity Derivatives (whose price will be relevant to the calculation of the settlement value of another Derivative position he holds) just before the close of trading. A's purpose is to position the price of the Commodity Derivatives at an artificial level so as to make a profit from his Derivative position;(b) B, a trader, holds a short position that will show a profit if a particular Financial Instrument, which is currently a component of an index, falls out of that index. Whether the Financial Instrument will fall out of the index depends on the closing price of the Financial Instrument on a particular day. B places a large sell order in this Financial Instrument just before the close of trading on that day. His purpose is to position the price of the Financial Instrument at an artificial level so that the Financial Instrument will drop out of the index resulting in his making a profit;(c) a fund manager, whose quarterly performance will improve if the valuation of his portfolio at the end of the quarter in question is higher rather than lower, places a large order to buy relatively illiquid Shares, which are also components of his portfolio. The order is to be executed near the close of the last trading day of the quarter. His purpose is to position the price of those Shares at an artificial level; and(d) an entity, A, purchases a large number of Shares of an Issuer on its initial public listing. In the period between that listing and the end of A's financial year, the price of the Issuer's Shares declines significantly. Near the close of market on the date of A's financial year end, a broker acting for A enters several bids to buy Shares in the Issuer. The bid prices are well above those at which the Shares had been trading and have the effect of significantly increasing the closing price of the Shares. The purpose of A making the bids is to increase the price of the Shares, marking up the book value of A's proprietary holdings in the Issuer, thus boosting its own financial position at year end.General factors(5) In considering whether conduct may contravene sections 92(4)(a) or (b), the Regulator may take into account factors such as:(a) the experience and knowledge of the users of the market in question;(b) the structure of the market, including its reporting, notification and transparency requirements;(c) the level of liquidity in the market;(d) the legal and regulatory requirements of the market concerned;(e) the identity and position of the person responsible for the conduct which has been observed; or(f) the extent and nature of the visibility or disclosure of the person's activity.(6) The following factors may, in the Regulator's view, indicate that conduct contravenes sections 92(4)(a) or (b):(a) if the transaction was executed in a particular way to create a false or misleading impression;(b) if the order or transaction does not appear to have a legitimate economic rationale;(c) if the person has another, illegitimate, reason for undertaking the transaction, bid or order to trade; or(d) if the motivating purpose for the transaction is to induce others to trade in, bid for or to position or move the price of, a Financial Instrument.(7) The following factors are, in the Regulator's view, likely to indicate that conduct does not contravene sections 92(4)(a) or (b):(a) if the conduct is pursuant to a prior legal or regulatory obligation owed to a third party; or(b) if the transaction was carried out in a particular way to comply with the rules of the relevant Exchange about how such transactions are to be executed.Factors relating to giving a false or misleading impression(8) In considering whether conduct may result in, or contribute to, a false or misleading impression as to the supply of, demand for, or price of a Financial Instrument, the Regulator may take into account factors such as:(a) the extent to which orders to trade given, or transactions undertaken, represent a significant proportion of the daily volume of transactions in the relevant Financial Instrument on the market concerned, in particular when these activities lead to a significant change in the price of the Financial Instrument;(b) the extent to which orders to trade given, or transactions undertaken, by persons with a significant buying or selling position in a Financial Instrument lead to significant changes in the price of the Financial Instrument;(c) whether transactions undertaken lead to no change in beneficial ownership of a Financial Instrument;(d) the extent to which orders to trade given, or transactions undertaken, include position reversals in a short period;(e) 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;(f) the extent to which orders to trade given change the representation of the best bid or Offer prices in a Financial Instrument on a market, or more generally the representation of the order book available to market participants, and are removed before they are executed;(g) 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; or(h) the extent to which orders to trade given or transactions undertaken by persons are preceded or followed by a dissemination of false or misleading information by such persons.Factors relating to creating an artificial price(9) In considering whether or not conduct creates, or is likely to create, an artificial price under sections 92(4)(b), the Regulator is likely to take into account factors such as:(a) the extent to which the person had a direct or indirect interest in the price or value of the Financial Instrument;(b) the extent to which price, rate or option volatility movements, and the volatility of these factors for the Financial Instrument in question, are outside their normal intra-day, daily, weekly or monthly range; or(c) whether a person has successively and consistently increased or decreased his bid, Offer or the price he has paid for a Financial Instrument.Maximising profit and trading outside normal range(10) It is unlikely that the conduct of market participants in dealing 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 creating an artificial price.(11) The fact that prices in the market are trading outside their normal range does not necessarily indicate that someone has engaged in conduct for the purpose of positioning prices at an artificial level. High or low prices relative to a trading range can be the result of the proper interplay of supply and demand.
Abusive squeezes(12) Squeezes occur relatively frequently when the proper interaction of supply and demand leads to market tightness, but this does not of itself indicate that there has been Market Abuse. Having the power significantly to influence the supply of, or demand for, or delivery mechanisms for a Financial Instrument (e.g. through ownership, borrowing or reserving the Financial Instrument in question) does not of itself amount to Market Abuse.(13) The following are specific examples of an abusive squeeze that, in the Regulator's view, may contravene sections 92 (4)(b):(a) during the course of a trading day on a Commodity Derivative Exchange, a trader rapidly builds up a position of more than 90% of the physical inventory underlying a crude oil contract. The trader fails to Offer to lend the crude oil back to other market participants at a reasonable commercial rate. The trader then unwinds his position in the Exchange's final settlement window1 at rapidly increasing prices, thereby cornering/squeezing the crude oil market. His conduct causes an abnormal movement in the price of crude oil contracts for forward month delivery; and(b) a trader with a long position in bond futures, buys or borrows a large amount of the 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 persons with short positions have to deliver to satisfy their obligations at a materially higher level, making him a profit on his position.(14) In considering whether a person has engaged in an abusive squeeze that contravenes sections 92(4)(b), the Regulator may take into account factors such as:(a) 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, conduct is less likely to amount to an abusive squeeze if a person is willing to lend the Financial Instrument or the underlying Financial Instrument or commodity in question;(b) the extent to which the person's activity causes, or risks causing, settlement default by other market participants. The more widespread the risk of settlement default, the more likely that an abusive squeeze has occurred;(c) the extent to which prices under the delivery mechanisms of the market diverge from the prices for delivery of the Financial Instrument or underlying Financial Instrument or commodity outside those mechanisms. The greater the divergence beyond that to be reasonably expected, the more likely that an abusive squeeze has occurred; and(d) the extent to which the spot or immediate market compared to the forward market is unusually expensive or inexpensive or the extent to which lending or borrowing rates are unusually expensive or inexpensive.
1 The period which occurs during the last trading day of the month for the relevant contract when the Exchange calculates the final settlement price.
2-3 Defences(1) A number of defences to section 92(4) are set out in within section 92(4) itself.
Market Practice(2) If a person establishes that they carried out the conduct or practice for legitimate reasons and in conformance with an Accepted Market Practice (see section 92(4)).
Price Stabilisation(3) section 93(3)(b) provides that:
Behaviour does not amount to Market Abuse for the purposes of these Regulations if ... it conforms with the Price Stabilising Rules...(4) The effect of section 93(3)(b) is that if a person establishes that they carried out a Price Stabilisation in accordance with the ADGM Rulebook, this conduct will not contravene section 92. The Price Stablising Rules as defined in the FSMR set out the relevant Rules relating to carrying on a Price Stabilisation that must be complied with.
Purchase of one's own Shares(5) Another general example of conduct which may amount to a defence to market manipulation includes instances where a person purchases their own Shares in accordance with the FSMR and Markets Rules.