Does history repeat itself in market misconduct?

The Financial Markets Standards Board (FMSB) believes so. Or at least the recent FMSB report indicates that there are common broad behaviours that feature in market misconduct over time and across jurisdictions, which we can learn from to raise standards in the wholesale markets.

The FMSB analysis

This report updates the analysis published in 2018 and includes 76 examples of market misconduct enforcement from 14 jurisdictions across asset classes. The FMSB concludes that market misconduct cases that have been seen for centuries predominantly involve these six broad behaviours:

• Price manipulation
• Circular trading
• Misuse of inside information
• Reference price influence
• Improper order handling
• Misleading customers and markets

The FMSB concludes that these behaviours are present in market misconduct enforcement cases across jurisdictions and time. Taking some of the examples from the report, the traders who cornered the onion futures market on the Chicago exchange in 1955 and a trader responsible for 92% of the day’s trading in illiquid government securities during quantitative easing are equally responsible for market manipulation despite the differences in asset class, location and era. Likewise, there are parallels between ‘pump and dump’ schemes over time irrespective of developments in communication: the change from newspaper column tips in the 1990s and the use of twitter to online subscription chats in 2020 does not change the underlying behaviour.

The range of examples are used to highlight that these behaviours feature in all fixed income, currency, commodity and equity markets, as well as in new asset classes. As the FMSB states, “asset classes do not generate conduct risks - people do”.

The FMSB illustrates the point with case studies including false information that Napoleon was dead in 1814 to influence the UK government bond market and the SEC sanctioning individuals for misleading investors about the profitability of cryptoassets in 2017.

The FMSB comments that the six behaviours adapt to new technology, market structures and the investment environment. Technological innovation is continuous, giving rise to the risk of these forms of market misconduct in new areas and situations.

The report can help market participants 

Regulatory Rules and legislation are often developed in reaction to market misconduct, for example the inclusion of benchmarks in European and UK market abuse legislation following the IBOR enforcement cases. Enforcement decisions are often principles-based, offering limited practical guidance for firms in future scenarios. So neither fulfil the role of adequate, detailed and practical guidance applicable in a rapidly evolving wholesale market.

The FMSB’s collation of case studies based on enforcement actions may fill a gap to provide market participants with some practical lessons and to give insights as to the steps that firms can take to help prevent those behaviours from occurring in a changing environment. And in some cases technology can be harnessed to help firms detect market misconduct of employees and other market players.

Current risks that market participants and compliance teams need to consider include the use of AI and machine learning in automated trading, the potential for ESG claims to mislead investors, the potential use of modern communications options accessible to non-professional retail investors who are less able to conduct their own analysis, and the increased scope for concealed misconduct when market professionals are able to work remotely.