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Locking up Business Manipulation

Locking up business manipulation

Mark Steward, Executive Director of Compliance and Industry Oversight of the FCA, gave a speech on the continuing attempts of the FCA to fight market manipulation during the COVID-19 pandemic.

Mr Steward's remarks are not dissimilar to those made by Julia Hogget in her speech last October (see our update). It is apparent that the improvements caused by the pandemic (such as working from home) continue to have a huge effect on consumer manipulation and the steps needed to deter it. In addition to a series of broad remarks on the reform proposals of the FCA (such as a more relaxed approach to immediate capital raising), Mr Steward made a number of key observations.

Rises in trade not balanced by increases in STORs

The FCA recorded a 34% rise in transactions and activity reports in 2020 without a comparable increase in irregular transactions and order reports (STORs). In reality, during the first lock-down cycle (March to June 2020) the FCA saw a decline in STORs. After the first lockdown, STORs have now returned to their expected rate for all asset groups, however the overall volumes for the year are smaller than in previous years.

Although it can be concluded that incidents of market manipulation or other fraud may have been overlooked, the FCA is not troubled – it credits this, at least in part, to its monitoring and investigation activity during the past few years, which has limited the selling of parties whose trading has led to a high number of STORs.

Business data analysis capability – regulatory sunlight

STORs remain a crucial alternate source of knowledge, but the FCA is not fully reliant on them. Instead, the business data analysis facilities of the FCA "continue to be a source of regulatory sunlight," delivering an algorithmic radar through trading in near-real time.

The FCA has expanded its aggressive market surveillance throughout the year by implementing new measures such as the Electronic Submission System (ESS) for short selling reporting. It was in operation until the first lockdown. The ESS is:

  • speeds up the validation process;
  • Introduces automatic warnings that readily detect delayed notifications;
  • Provides greater perspective and evidence on short selling stance than ever

Retail buyers need not be sold in the short term

Mr Steward observed that the FCA's continued approach to short selling reporting requirements rendered it impossible that short positions such as those established in the recent GameStop trading frenzies will be generated on the UK market without "substantial scrutiny." Although expressly refraining from speaking on GameStop, Mr Steward noted the propensity for abusive shortening to contribute to market distortion and noted the enhanced potential for institutional investors to be affected by such violence. It also indicated the vulnerability of retail buyers to fraudulent internet ads or online scams.

Market cleanliness-Anomalous trade is being tracked

The FCA launched a new market cleanliness metric, the potential anomaly trading ratio (PATR) in September of last year. PATR allows the FCA to track underlying market activity surrounding price-sensitive statements that may be called anomaly rather than suspect (unlike, for example, the Abnormal Trading Volume, which focuses on volume fluctuations). The FCA finds that the word "anomaly" is more neutral than the term "suspicious."

Mr Steward continued by stating that the FCA would continue to pursue steps to counter industry manipulation and outlined a variety of recent regulatory actions. It is evident from the recent speeches by Mrs Hoggett and Mr Steward that "business cleanliness" is a core priority of the FCA, with the introduction of digital technologies enabling data to be analyzed at an increasingly granular level. The inclusion of the PATR is another tool in the FCA's data collection arsenal, and we don't consider it to be the last. As markets begin to adjust to a much-changing environment, the FCA seems ready to seek to close all potential opportunities for market manipulation.