FSA publishes Market Watch 26

29 Apr 2008 04:37 PM

The Financial Services Authority (FSA) today published Market Watch 26, which focuses on market conduct and transaction monitoring issues.

Market Watch 26 is a general review of the FSA’s strategy to tackle market abuse, in particular insider dealing through credible deterrence, and also contains the market cleanliness statistics for 2006 and 2007.

Sally Dewar, Managing Director of Wholesale and Institutional Markets said:

“Clean markets are vital to the continuing success of London as an international financial centre. Market misconduct, particularly in the form of insider dealing and market manipulation is, put simply, cheating and reduces investor confidence in the UK markets. Our aim is to have a regime which achieves 'credible deterrence' and ensures a level of market quality we can all be proud of.”

One of the most significant components of credible deterrence is ensuring that there is a genuine fear that wrongdoing will be identified and that the punishment received will be meaningful. Market Watch 26 therefore expands on the FSA’s enforcement approach, reiterating that sanctions will be imposed against wrongful behaviour that will be severe enough to have a deterrent effect. To this end the FSA has enhanced its in-house criminal investigation and prosecution skills and has begun a criminal insider dealing prosecution. It also states that there will be increased financial penalties in cases pursued through the civil route.

The FSA measures market cleanliness through informed price movements (IPM). In 2006 and 2007 FTSE100 merger and acquisitions announcements were accompanied by IPMs in 28.6 per cent and 28.7 per cent of cases respectively, an increase from 23.7 per cent in 2005. It is easy to misinterpret what these statistics show and they are often reported as suggesting the level of IPMs is a direct match for the level of insider dealing, but this is an inaccurate misrepresentation. Rather than solely indicating insider dealing, IPMs can also denote the following:

  1. Abnormal trading ahead of announcements, due to circumstances such as financial analysts and the media correctly assessing which companies are likely takeover targets.
  2. A deliberate ‘strategic’ leak of information by a company to position a deal in the marketplace.
  3. Trades by 'informed' traders who picked up on and derived information from insiders' trades.

The newsletter also details work undertaken to prevent insider dealing, in particular the M&A project commenced in 2007, advances in detection techniques and obtaining market intelligence, and tools available to the FSA for the investigation of market abuse.

In light of market rumours that circulated in March 2008, the Market Watch mentions that the FSA will undertake a thematic review of firms’ policies in relation to the dissemination of rumours.

Notes for editors

  1. Issue 26 of Market Watch is available on the FSA website.
  2. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
  3. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.