Concerns over insider trading mount

By Leanna Reeves

8 April 2021

Insider trading must be tackled by regulators to provide a fairer market for small shareholders, particularly since the pandemic caused record levels of retail trading accounts, says Mohammed Rharrabti, senior business analyst at Natixis.

“You can go to a forum and see many people exchange about their trade and shares. If you’re a small shareholder, you will have the opportunity to see all the moves. If you see something gaining 20 percent in a day it could be because of the news and so on, but there will be people that have taken this position 10 days before. This is not normal.” he says.

“We see that move every day, on every exchange, but in the meantime, I don’t see a sign from the FCA or other regulators.”

Front running – despite being legal – must also change, according to Rherrabti. Whilst knowing the market in-depth and selling information on stop-losses, brokers have an advantageous position compared to small shareholders.

“The market is not fair. This is a big thing that must evolve, it’s something that can be put on brokers’ rule of compliance. This way, brokers will not sell information and you do not have market manipulation,” says Rherrabti.

Regulators have yet taken action against the market manipulation in regard to short positions.

In February, the UK’s Financial Conduct Authority’s (FCA) executive director of enforcement and market oversight Mark Steward highlighted the FCA’s ambition to combat market abuse through surveillance and investigation work, as well as an increase in proactive market monitoring and the introduction of new initiatives, including a new approach for short selling reporting.

The new approach adopted by the FCA on short selling reporting now demands sort positions to be reported on the Electronic Submission System (ESS) – which will be rolled out to long position reporting.

Short positions above 0.1 percent must be reported to the UK regulator whilst positions above 0.5 percent must be made public, daily.

“[…] abusive shorting can lead to distortions in a market, especially when there is insufficient cover and inevitable squeeze opportunities arise,” said Steward.

In France, the Authorite des Marches Financiers (AMF) announced a one-month short-selling ban, effective on March 18 until April 16, to combat the continuous market abuse generated by the health crisis.

“It was good to stop share prices continue to fall. Some investors will not agree with that because they wanted the market to fall at a maximum,” he says.

On March 15, however, the European Securities and Markets Authority (Esma) announced it will not renew the requirement on reporting of net short positions of 0.1 percent and above, which expired on March 19.

There has also been increased focus in combatting the high level of Suspicious Transaction and Order Reports (STORs).

Whilst the period between March and June last year encountered a decrease in STORs, Steward noted that STORs levels had returned to pre-pandemic levels, as expected. Despite this, he insisted the FCA’s surveillance and investigation work helped tackle a high number of STORs caused by the trading of certain actors.

“Any communication monitoring surveillance where you can combine as much information as possible to generate true positive alerts, that’s where the real market will move to,” says a market abuse analyst at a large UK-based consultancy firm.

“The question is around data. It’s how the data is used and analysed – that’s the next challenge for the regulator. How the FCA picks that data apart is essential to the ability for them to identify real risk in the marketplace. There’s always room for improvement in any monitoring side.”

The FCA also introduced the Potentially Anomalous Trading Ratio (PATR) last year, which focuses on underlying trading behaviour around specified price-sensitive announcements and deems whether the behaviour is anomalous or not.

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