People seeking to abuse the insider knowledge they have to make a quick buck place their fingers on the scales. As well as disadvantaging those who play by the rules, they undermine confidence in markets that are vital for companies seeking capital and investors building their savings. It is natural and legitimate therefore that people have questions for us as the markets regulator about what we’re doing to prevent and tackle such market abuse.
Given recent press reports about our approach, we wanted to outline the work we do to tackle insider dealing and manipulation. We have also previously provided information on how we do this in speeches[2] and tackling market abuse is one of our strategic priorities[3].
Ours is a data-led approach. We undertake daily monitoring to ensure the timeliness and accuracy of the disclosure of inside information. Firms and venues send over 30 million transaction reports and over 100 million order reports a day, which are analysed by our market data processor. This processor is a source of regulatory sunshine that allows us to oversee the market in close to real time, with dedicated software and algorithms to detect potential issues.
We use our data to publish market cleanliness statistics each year, which were quoted correctly in recent press reports. These statistics provide a helpful benchmark. But, as we know from our work, they cannot be extrapolated into evidence of market abuse. Abnormal price and volume movements can be triggered by a host of legitimate reasons.
The data we collect and analyse is complimented by Suspicious Transaction and Order Reports sent to us by market participants when they have ‘reasonable grounds’ to suspect market abuse, such as insider dealing, or market manipulation. We received over 90 reports a week last year, and the number sent increased by almost 15% on 2020. Each one of these is assessed by our specialist team, which seeks to establish whether any abusive or manipulative behaviour has taken place and, if we suspect it has, what further action it’s right for us to take.
To support market participants to play their role in tackling insider dealing and manipulation, we regularly publish the findings of our oversight work in our Market Watch publication, which shares good practice and highlights weaknesses likely to be common in firms’ systems and controls. These notes provide up to date information for firms that also facilitates their scrutiny of the market which, in turn, improves the quality of the Suspicious Transaction and Order Reports we receive from them.
This intensive scrutiny is as important as a deterrent as it is for detection. If participants know they’re being watched, by us, by their employers, their brokers, by everyone involved in the market, they are less likely to take part in activity that seeks an unfair advantage.
Where we do detect market abuse, one of the tools at our disposal is criminal prosecution. But it is not the only tool. For example, we have taken enforcement action ourselves where we’ve seen false or misleading statements or other forms of market manipulation. This action has resulted in fines for both firms and individuals.
Where it is right to do so we take criminal action. Already this year we have been in court for a trial in which the jury was unable to reach a verdict. We have another trial involving two defendants scheduled to start in October 2022 and a further three cases in which prosecution decisions will be made relating to 10 individuals before the end of the year.
Quite rightly the burden of proof in a criminal case is high – beyond reasonable doubt. However, in many of the reports or concerns we review, strong suspicion is often matched by weak or non-existent evidence. The challenge of building a criminal case begins well before we reach court and, as a prosecutor, we need to conclude a court would be more likely than not to convict before we charge a suspect.
We also make use of our civil enforcement powers, which has a different standard of proof. More than 10 subjects are currently awaiting decisions on their cases, following our investigations for market abuse or manipulation.
Often it is not the case of criminal action being preferable to civil enforcement. Both have their merits, leaving aside the question of standard of proof. For example, civil action can be used to secure redress for investors, as we did when we censured Redcentric[4] in 2020.
As well as using our intelligence to assess one-off cases, we also use it to disrupt the activity of suspected serial market abusers. Often these individuals and activities cross national boundaries, which means they may be out of reach of our enforcement powers or are abusing information obtained in the UK to trade in foreign markets. We work with our international partners to bring our data and intelligence to bear in these cases. We have recently had significant success in this regard collaborating with the DFSA in Dubai and the AMF in France and sharing intelligence with colleagues in the United States, all of which have led to action in those places.
This work – deterring, detecting, and taking action where market abuse is suspected – is supported by a highly expert team. Our resources are not limited to one offence, such as insider dealing, or one form of action, such as criminal prosecution. The effort spans the blended approach of prevention and deterrence across all forms of market abuse. This involves the collective efforts of approximately 90 enforcement staff supported by dedicated specialist intelligence, legal and cyber resources as well as our primary and secondary market oversight teams, dedicated to tackling market abuse in all its forms.
The aggregate picture is one of increasing intensity, scrutiny and sophisticated action, in which criminal prosecution is one of several concurrent strategies being deployed. We are determined to tackle market abuse and insider dealing wherever there is evidence of it whether this is through the courts or our own powers. Those considering attempting to manipulate our markets should be on notice that we will not hesitate to act.