The UK Financial Conduct Authority (FCA) published the 48th edition of its “Market Watch” newsletter on June 22. Market Watch is the FCA’s periodic newsletter for publishing its guidance on market conduct and transaction reporting issues. This latest edition includes guidance and commentary from the FCA on:
Trade Volume Advertising. Some firms choose to advertise their trading volumes solely through automatic feeds, which derive directly from the firm’s trading software. These feeds are usually delayed and, therefore, during this time gap, the market remains unaware of recent trading activity. However, the FCA notes that some other firms choose to advertise trading volumes using both automatic feeds and an element of discretion, which allows traders to override the automatic feed. This discretionary element enables traders to immediately advertise any significant trading volume.
The FCA notes that some market participants have raised concerns to the FCA of firms publishing incorrect trading volume data in the equity market. The FCA highlights the possible market abuse risks related to such practices: (1) incorrectly advertised volumes could create false or misleading impressions as to the supply/ demand of stock traded by a firm, which could, in turn, encourage market participants to trade the stock through the firm, and (2) advertised volumes creating false or misleading impressions could amount to offenses under the EU Market Abuse Directive.
FCA Observations From Suspicious Transaction Reporting Supervisory Visits. Since 2013 the FCA has been undertaking a series of supervisory visits to a variety of FCA-authorized firms in the UK in order to better understand and assess the way in which potential incidents of market abuse are being identified, including looking at how staff escalate their concerns to their compliance officer, and how those compliance officers identify potential incidents of market abuse through surveillance.
The FCA believes that suspicious transaction reporting (STR) submission is inconsistent across all areas of the UK financial services industry, and that submission levels are sometimes too low. The FCA comments that the quality of the STRs that it receives is generally very good, although there are some firms that submit significantly fewer than their peers, and some asset classes for which the FCA believes surveillance is less-developed, which suggests that incidents are being missed. The FCA also believes that there may be cultural obstacles to the detection of market abuse in some asset classes, and has identified that some firms have failed to adapt their processes to close these gaps.
The FCA sees the detection of market abuse as a partnership between the regulator and industry, and is aware that it is important that the FCA helps firms — as the first line of defense against market abuse — to understand its expectations. To that end, the FCA provides detailed commentary in Market Watch 48 regarding some areas where it thinks firms could do better with STRs.
Direct Electronic Access Pre-Trade Controls. The FCA comments that in Market Watch 46 (July 2014), it detailed the events that led to a spike in the intraday price of a British bank. The FCA subsequently reviewed pre-trade controls for cash equity direct electronic access (DEA) trading more generally — covering Direct Market Access (DMA) and Sponsored Access (SA) trading. The FCA’s findings, based on analysis of the documentation requested and onsite visits were focused in three areas: (1) pre-trade controls, (2) control setting and amendment procedures, and (3) ongoing monitoring and incident surveillance.
Market Watch 48 is available here.