Spoofing – is the UK FCA catching up with US enforcement trends?

Spoofing – flooding the market with orders that traders do not intend to execute to trick others into moving prices in a desired direction – has been a focus of enforcement agencies in the US for some time, with some recent high profile fines.

After a hiatus in FCA enforcement this year generally, and an even longer gap since the FCA’s last spoofing enforcement action in 2017, the regulator has published two recent enforcement decisions relating to market manipulation. The FCA has had between 25 and 30 open investigations for market manipulation over the last couple of years and this low rate of return on the FCA’s investment highlights how these cases are complex to investigate. Perhaps the recent enforcement decisions show that the FCA is starting to work out a way to bring these cases to an enforcement decision more efficiently – perhaps its rate of return is about to head upwards.

In mid-September, the FCA decided to impose a financial penalty on an experienced trader and portfolio manager for the manipulative practice of “spoofing” (see the decision notice). The FCA found that Mr Abbattista placed a series of orders for equity contracts for difference, which he did not intend to execute, whilst placing smaller orders on the opposite side of the book, which he did intend to trade on. In the FCA’s view this conduct created a misleading impression of the supply and demand in the market, particularly as the cancelled trades were large compared with the opposing trades executed.

The FCA claims that this enforcement investigation was started when the FCA’s new data analytics tools identified the trading pattern. The FCA has repeatedly publicised (for example in its 2018/19 Annual Report p9 and p19) its improved analytical capabilities for market surveillance and transaction report analysis to pursue its objective of tackling market manipulation. This is one of the first publicised successes of the FCAs new technology, which is being adopted by regulators around the world. If there is to be any increase in enforcement decisions for spoofing, or indeed other forms of market manipulation, it is likely that these new tools will be behind that increase.

As a result, firms will have to review their own use of analytical tools to keep pace with the FCA and ensure their internal trading surveillance systems keep up as technology develops. We anticipate that the expectations of the regulators will likely increase in line with their improved tech-driven capabilities.

It is worth noting that the Abbattista trades took place in 2017, so it has taken over three years to reach an enforcement decision on the investigation. Mr Abbattista is also challenging the decision, so it will be some time yet before this enforcement case concludes. The length of the enforcement action is by no means unusual (the average for a contested case in 2019/20 was just under four and a half years), but indicates that it may still be some time before a higher volume of enforcement notices for market manipulation make their way through the system.

Separately, in an indication that the FCA has not abandoned more traditional methods of enforcement, its second recent enforcement decision brought to an end the long-running enforcement action against a third executive of the Worldspreads group of companies, which collapsed in 2012. The FCA published a public censure and prohibition from the financial sector against Mr Foley in lieu of a penalty of £628,000 due to Mr Foley’s financial position. In the related enforcement actions, the FCA levelled a range of allegations against the directors for misleading investors as to the value of shares in the group by omitting key information and including misleading information in the original listing documents in 2007, failing to disclose executive loans and the practice of subsidiaries hedging trading exposures with company executives.

Watch this space for other enforcement outcomes as the FCA picks up the pace in this area.

For an insight into market abuse enforcement developments in Hong Kong, the US and Germany, please listen to our podcast in conversation with Tim Mak, Kim Zelnick and Daniel Travers.