{"id":63088,"date":"2023-07-21T06:35:56","date_gmt":"2023-07-21T06:35:56","guid":{"rendered":"https:\/\/lgca.uk\/?p=63088"},"modified":"2023-07-21T06:35:56","modified_gmt":"2023-07-21T06:35:56","slug":"insider-dealing-and-market-manipulation","status":"publish","type":"post","link":"https:\/\/lgca.uk\/el\/insider-dealing-and-market-manipulation\/","title":{"rendered":"Insider Dealing and Market Manipulation"},"content":{"rendered":"

Introduction <\/strong><\/p>\n

Insider dealing and market manipulation are two prominent, yet unethical practices in financial markets. Insider dealing refers to the trading of a public company’s stock or other securities by individuals with potential access to non-public, price-sensitive information. This practice, viewed as an infringement of fair market operations, is strictly regulated by a strong regulatory framework. Market manipulation, on the other hand, involves actions aimed at artificially influencing the price or volume of securities, thereby distorting the true economic parameters. Examples include churning, wash trades, and corners, all detrimental to the integrity of the markets. They undermine the cornerstone of finance: confidence in fair and efficient markets. Both practices, whilst distinct, significantly hamper market transparency, liquidity and efficiency, leading to legal ramifications.<\/p>\n

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What Could Happen if\u2026?<\/strong><\/p>\n

Permitting insider dealing and market manipulation to persist unabated could have severe implications for financial markets and the broader economy. These practices could engender distrust in the integrity of markets, deter investor participation, and impede the efficient allocation of resources. With insider dealing, those with privileged information could reap unfair gains, thereby damaging market fairness and equality. Market manipulation could distort genuine supply and demand dynamics, leading to artificial price movements and triggering undue economic responses. Over time, these practices would contribute to financial instability and undermine the foundational principles of free-market economies, such as fairness, transparency and efficiency. Furthermore, such practices could discourage international investment, significantly threatening economic growth and development. These potential consequences underline the importance of robust regulatory mechanisms in maintaining market integrity.<\/p>\n

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Market Abuse Regulations<\/strong><\/p>\n

Market abuse, inclusive of insider dealing and the misuse of insider information, poses a significant threat to the integrity and transparency of financial markets. In the United Kingdom, the principal regulatory framework aimed at preventing such practices is the Market Abuse Regulation (MAR), complemented by the Criminal Justice Act 1993 (CJA) and the Financial Services and Markets Act 2000 (FSMA).<\/p>\n

The MAR, enacted in 2014 and effective from 2016, encompasses the entirety of the EU, addressing issues of insider dealing, unlawful disclosure of inside information, and market manipulation. It enhances the ability of regulators, notably the Financial Conduct Authority (FCA), to supervise market participants and react promptly to potential market abuse. Under the MAR, \u2018inside information\u2019 is clearly defined, and prohibitions on using such information for trading, or attempting to trade, are explicitly outlined. Post-Brexit, the UK has retained the EU\u2019s MAR, with the government expressing intent to diverge only where necessary. This ensures alignment with European markets, whilst permitting a more bespoke approach to regulation locally.<\/p>\n

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The CJA criminalises insider dealing, defined as dealing in price-sensitive securities on the basis of inside information which, if generally known, would significantly impact their price. It also forbids encouraging others to deal on the basis of inside information and disclosing inside information outside the normal course of employment, profession or duties.<\/p>\n

The FSMA provides the FCA with powers to impose unlimited fines, order injunctions, and make restitution orders against those who breach the rules. Under FSMA, the FCA has introduced the Code of Market Conduct, which offers guidance on whether behaviour amounts to market abuse.<\/p>\n

The rigorousness of these legal instruments underscores the UK’s commitment to uphold market integrity, safeguard investor interests, and maintain confidence in its financial markets.<\/p>\n

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More Details on Definitions<\/strong><\/p>\n

Insider dealing<\/em><\/strong>, a prohibited activity under the Financial Services and Markets Act 2000, refers to the buying or selling of a company’s shares by individuals who possess non-public, price-sensitive information about those shares. This non-public information, if disclosed, could significantly influence the share price. For instance, if a director learns, before a public announcement, that their company is going to be taken over, which would likely result in a considerable increase in the share price, and then purchases shares in the company based on this information, they are engaging in insider dealing. This conduct undermines market fairness and transparency and is punishable under law.<\/p>\n

Unlawful disclosure of inside information<\/em><\/strong> occurs when an insider\u2014someone privy to non-public, price-sensitive information\u2014shares that information with others outside of the necessary course of their work, profession or duties. Essentially, it is an illegal act of tipping, which enables others to gain an unfair trading advantage. A practical example: An executive in a pharmaceutical company who learns of a breakthrough in a new drug trial discloses this information to a family member before it’s publicly announced. The family member then buys shares in the company expecting their value to rise after the announcement. This scenario represents unlawful disclosure of inside information.<\/p>\n

Market manipulation<\/em><\/strong> refers to the practice of artificially inflating or deflating the price of a security or otherwise influencing the behaviour of the market for personal gain. This could involve spreading false or misleading information, executing artificial trades or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. Consider this practical example: A trader might engage in ‘wash trading’, a form of manipulation where they simultaneously buy and sell the same security to create misleading, artificial activity in the marketplace, thereby attracting unsuspecting investors and inflating the security’s price.<\/p>\n

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What can organisations do?<\/strong><\/p>\n

Organisations can utilise several methods to detect and prevent market abuse. A range of these options include:<\/p>\n