In a recent post by eFlow Global, the company took a ‘deep dive’ into the Financial Conduct Authority’s Market Watch 73.
Market abuse is a sweeping term that describes various dishonest and manipulative behaviours in the financial markets, including insider dealing, market manipulation, and misleading disclosures. Such unscrupulous activities can damage the financial market’s integrity, dent investor trust, and compromise transaction fairness by skewing prices or giving specific participants an unfair edge.
Therefore, identifying and curbing market abuse is vital for safeguarding investors and protecting honest actors from deceptive practices. To accomplish this, the private and public sectors must exploit a blend of regulation and technology to identify and prevent manipulative behaviours.
The UK’s principal regulatory authority, the Financial Conduct Authority (FCA), handles these issues. Their established “Market Watch” series is a mechanism for conveying information and advice back to the private sector. Practically, this series allows the FCA to share its observations and findings from various reviews, investigations, and research covering an array of regulatory topics, including market abuse.
Market Watch 73 delves into the FCA’s recent examination of firms offering Contracts for Difference (CFDs) and spread bets, products deemed increasingly susceptible to insider dealing and therefore significant contributors to Suspicious Transaction and Order Reports (STORs). The review aims to comprehend and boost the standards of CFD providers’ strategies to spot and report potential market abuse. The FCA used a thorough methodology for this, including questioning firms about their business models, reviewing firms’ documentation, and conducting supervisory visits.
While the FCA noted that all firms have surveillance systems in place to detect insider dealing, there’s still room for improvement. The regulator has offered practical advice to enhance their market abuse detection capabilities. This includes comprehensive risk assessments, evaluating surveillance coverage, and effective detection of manipulative practices like “narrowing the spread.”
Balancing engagement with front office staff on surveillance matters is another area the FCA emphasised, cautioning against ‘tipping off’ concerns. Firms are urged to confidently challenge and educate front office staff, without revealing suspicious client behaviours.
Firms should proactively show adherence to regulatory standards, focusing on comprehensive market abuse risk assessments. Furthermore, the FCA is encouraging the enhancement of order and trade surveillance capabilities, warning that certain emerging behaviours may not be adequately captured by existing technologies.
The FCA’s Market Watch series is part of their ongoing engagement with the CFD market, signifying their continuous efforts to address issues and ensure market integrity. In previous editions of the Market Watch, the FCA stressed the importance of effective order and trade surveillance that caters to different asset classes and instruments.
Firms should implement key takeaways like conducting thorough risk assessments, ensuring comprehensive staff training, and investing in advanced trade surveillance technology in response to the growing pressure and regulatory scrutiny faced by CFD providers.
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