A Timely Reminder to Ensure Adequate Market Surveillance

The publication by the FCA of a Decision Notice on September 16 will no doubt cause some anxiety within control functions at asset managers. The Notice outlines a financial penalty of £100,000 on a named individual working as a portfolio manager, and prohibits him from performing functions relating to regulated activity.

The action taken by the Regulator raises a number of interesting points, not least of which is the fact that the portfolio manager was also the firm’s Chief Investment Officer and chaired its Investment Committee. Most firms point to the existence and functions of a central Investment Committee as being a strong control against abuse. However, this and other market abuse enforcement cases by the FCA show that, without an effective compliance monitoring and surveillance capability in place, abuse can still result from the actions of individuals. Any such abuse can have disastrous consequences for the people involved, but perhaps more importantly it damages the reputation of the firm and the integrity of the wider market.

The Decision Notice details the trading activities of the individual involved, which took place in 2017 and involved placing larger than average market size orders for CFDs on liquid EU equities – orders that were cancelled after a short time.  Prior to the fictitious orders being placed, iceberg orders had been placed on the opposite side of the market, which were subsequently executed, it is alleged, to take advantage of price changes arising from the manipulative orders.

The Notice cites Article 12 of the Market Abuse Regulation (MAR) which prohibits the placing of an order to trade which gives, or is likely to give, a false or misleading signal as to the supply of or demand for or price of, a financial instrument, as well as supplementary MAR legislation which provides the following as an indicator of  manipulative behavior: “entering of orders which are withdrawn before execution, thus having the effect, or which are likely to have the effect, of giving a misleading impression that there is demand for or supply of a financial instrument” – usually known as “placing orders with no intention of executing them”.

Simon Green, Head of Compliance at RIMES, comments: “The Decision Notice raises important questions for asset managers. Firms not only need to ensure they have a surveillance system in place that can detect when individuals place orders with no intention of executing them, they also need to be able to quickly adapt existing surveillance analytical models to look for behavior that may not previously have been envisaged. If your surveillance systems do not meet these requirements, then it may be time for firms to consider reviewing whether their current system is still fit for purpose.

“The good news is that adopting advanced, automated market surveillance systems that are fit-for-purpose no longer requires costly infrastructure projects and disruptive deployments. Managed service providers like RIMES provide access to these capabilities through cloud-based delivery models, allowing rapid, smooth and cost-effective access to the required capabilities.”


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Financial Data Trends, September 22, 2020