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We explore the three types of market abuse you need to be aware of, and offer practical scenarios to demonstrate how you can spot and avoid it.
The term “market abuse” is given when a person or group of people act to disadvantage other investors in the market. There are three types of market abuse, defined as:
This is where a person buys or sells securities on the basis of material information that is not yet publicly known and which could affect the price of the securities if it were made public. For example, a takeover that has not yet been declared to the market.
This is where there is deliberate attempt to interfere with the pricing of a share or operation of a market in which such a share is traded. It can create an artificial, false or misleading impression of the price that may prompt others to react to this and could result disadvantaging others through such behaviour.
This is where a person possesses inside information and passes that information to someone who is not authorised to have it.
Market Abuse Regulation came into force in July 2016 with the aim to increase market integrity and investor protection. It falls under the UK’s civil market abuse regime and criminal regime; and it is a civil offence to trade based on insider information under these regimes.
As a result of insider dealing or market manipulation, innocent investors may buy or sell investments at a false price. Moreover, market abuse of this kind undermines confidence in markets.
We have our own internal procedures to detect suspicious trading activity which is reported to the FCA under regulatory requirements.
Stay vigilant and do not let others coerce you into dealing in shares if you think the motives could amount to market abuse.
|Scenario||Could this be interpreted as market abuse?||Why|
|A family member has told you to buy shares in a company that they work in as the shares will significantly increase in value within a week due to an announcement that will be made from the company which will have a positive impact on the share price. You act on the information and place the tradebeforethe company announcement on the public domain.||Yes||From what has been said it doesn’t sound like this information is in the public domain. It also appears that when the information does become public there is a good chance the share price will be impacted. Acting on any information received (via friends, family, overheard in conversation or other) that is not available in the public domain could constitute to insider dealing.|
|You read on a website that a company has just entered into discussions about a possible merger with another company. Having investigated, and based on what you have learned, you think the merger will impact the company share price positively and as such you intend to buy shares.||No||The information is in the public domain and you are acting on your own decision having done your own research.|
|You place multiple limit orders (placing orders to buy or sell when a share price reaches a certain level) in a security that is away from the current market price, then you subsequently cancel or amend the order(s), which creates a false impression of demand.||Yes||This could be seen as an attempt to interfere with pricing and give a misleading impression of demand. Others could react to this and market prices could change on the back of this activity. This could be construed as market manipulation.|
|You place a large order and request that the order be submitted minutes before the close of market trading, hoping to manipulate the market by raising the security’s closing price to make it appear higher than its actual value.||Yes||This could be seen as an attempt to interfere with pricing and give a misleading impression of demand. Others could react to this and market prices could change on the back of this activity. This could be construed as market manipulation.|
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