On 6 February 2020, Mark Steward, the FCA's Executive Director of Enforcement and Market Oversight, delivered a speech on the FCA's approach to market integrity in the UK's securities market to the Practising Law Institute's Annual Institute on Securities Regulation in Europe, London. He covered four key themes of interest to the reader, each dealt with separately below
Commonality and collaboration with international regulators
Perhaps with the backdrop of Brexit, Steward emphasised the common principles shared by regulators and the importance of collaboration. He stated that whilst there may be debate about technical differences in securities law between the UK, EU and US, the underpinnings of these jurisdictions' laws and practises are built on common principles. He highlighted these common principles as being defining in tackling insidious market abuse. Further, he warned of the need to avoid regulatory fragmentation in markets which will provide wrongdoers with arbitrage opportunities for misconduct. Steward highlighted the effectiveness of this global approach in a number of investigations being conducted.
Use of data for effective detection of misconduct
Steward explained that the consolidation of three sources of data provides the FCA with the ability to examine what is happening in markets with increasingly bright lights in close to real time. In 2019, these sources of data were:
- MiFID II transaction reports – 9.8 billion reports;
- FTSE 300 order book – 150 million order reports per day and the ability to aggregate orders in the same stock across different platforms; and
- Suspicious Transaction and Order Reports – 6,000 reports.
The market cleanliness metric, abnormal trading volume ratio and the FCA's strategic approach
Steward highlighted two metrics used to measure market integrity and concluded that the low scores produced by the metrics were due to the enhancement of the FCA's capabilities and harnessing the product of the market itself.
The first metric was the market cleanliness metric ("MC"). This was first published in 2008 as a proxy for actual or potential insider dealing in the market ahead of a takeover. In 2008, it found 30% of takeovers showed an abnormal price movement in the two days prior to its announcement. In 2013, this number was 15%, in 2016 it was 22% and in 2019 it was 10%.
Given the amount of data available to the FCA post MiFID II, the FCA has adopted a second metric, the Abnormal Trading Volume ratio ("ATV"). The ATV is calculated by observing movements in trading volumes of relevant securities that are the subject of an unexpected price sensitive announcement where there are no other potentially price sensitive announcements.
The salient differences between the MC and ATV are: the ATV takes into account a much broader and richer set of events and is not limited to takeovers, using over 1,000 unexpected, potentially price-sensitive announcements; the ATV includes products not considered before, such as contracts for difference and spread bets; and the ATV considers changes in volume as well as changes in prices.
In the case of the MC metric, Steward observed that the reduction from 2008 to 2019 of 30% down to 10% of takeovers showing abnormal price movements in the two days prior to announcement is a significantly positive movement. In 2019, the ATV's first year, the FCA tested 1070 announcements and found, on average, that 6.4% of them were associated with an abnormal price increase.
He concluded that these low scores were partly as a result of the dynamic interaction between the FCA's capabilities. He highlighted the integrated approach across the FCA, specifically mentioning enforcement, wholesale supervision and primary and secondary market oversight and surveillance. He also concluded that the low scores were as a result of harnessing the product of the market itself. That is, that the strong action taken against firms that failed to implement appropriate systems and controls to carry out their own trade surveillance, to report obviously suspicious activity or to report transactions accurately at all was key.
His warning was that such detection tools should force a recalculation of the wrongdoers' 'risk of being caught vs reward' ratio.
Market manipulation
Here, Steward highlighted how the FCA was willing to take on the hardest cases, which he said was illustrated in its taking on challenging cases in the market manipulation space. He explained that given the corrosive nature of market manipulation to market integrity, the FCA's focus was now 60:40 between insider dealing and market manipulation cases. Previously the FCA's focus had been almost exclusively on insider dealing.