Navigating market abuse enforcements: current focus and future implications


In a recent post by eFlow Global, the company outlined some of the biggest challenges around navigating market abuse enforcement and future implications.

Market abuse is a broad term describing numerous illicit practices in the financial sector. Such practices distort the fairness of markets, erode investor confidence and, ultimately, hamper the wider economy. Market abuse generally falls into two categories: insider trading and market manipulation.

Insider trading involves the use of undisclosed, significant information to make investment decisions, providing the user an unfair advantage over other market participants. Market manipulation, conversely, includes a variety of strategies intended to artificially affect the price or trading volume of a security. Tactics include naked short selling, spoofing, ramping, and pump & dump schemes.

To shed light on the sanctions against these practices, we’ve examined worldwide regulatory fines on companies for market abuse from 2019-2022, which amounted to $1.9bn across nine primary jurisdictions. We’ve also looked at qualitative data, including consultations and press releases by regulators, along with reports on individual enforcement action, to discern potential future focuses and priorities.

Which regulators have been particularly active? An analysis of the global perspective indicates that the US has been the primary driver of market abuse fines from 2019-2022. Various factors may account for this, such as the size of the US market, extraterritorial jurisdiction, well-funded and proactive regulators, and a handful of high-profile cases that have amplified the numbers.

The comparatively lower figures in other regions are also notable. It’s crucial to remember that while these fines were imposed during this period, they often relate to offences which initially occurred 5-10 years prior. This suggests that numerous significant investigations are likely ongoing globally. However, it’s clear that the total cost of non-compliance isn’t fully encapsulated by regulatory enforcements. Non-compliant firms frequently encounter other hurdles, such as remediation costs, reputational damage, and impacts on stock prices.

Breaking down the market abuse fines imposed by key US institutions during this period reveals that the Financial Industry Regulatory Authority (FINRA) has been the most active in terms of enforcement actions’ volume, while the US Commodity Futures Trading Commission (CFTC) and the Department of Justice (DOJ) have imposed substantially larger total fines.

A noteworthy trend in market abuse fines from 2019 to 2022 is that a significant majority of penalties were imposed on firms for market manipulation violations. In contrast, there were relatively few fines imposed on firms for insider trading during the same period. This could be because insider trading offences are more likely to be charged at the individual level.

For instance, in 2019, Sean Stewart, a former senior banker at two New York investment banks, was sentenced to 24 months in prison by the US DOJ for providing his father with confidential information about five healthcare company acquisitions before public announcements.

Nevertheless, this doesn’t mean firms are entirely exempt from the consequences of insider trading. Firms can still face reputational damage and increased scrutiny from regulators if their employees engage in such activities.

Analysing recent trends, the latest year of data shows a heightened focus on enforcing deficiencies in firms’ systems and controls. Although fines for these offences are relatively lower, they do highlight firms as targets for further investigation. Furthermore, certain regulators are deploying their own technology to detect market abuse.

These include ASIC’s MAI platform, which allows market participants to access ASIC’s market surveillance data and analysis tools, enhancing market transparency and oversight.

In addition, there is BaFIN’s ALMA, which is a real-time surveillance system designed to monitor and detect potential violations of financial regulations.Also, there is SEC’s ATLAS Initiative. This program, introduced in 2019, uses advanced data analytics and machine learning to detect potential insider trading and market manipulation.

As technology continues to evolve, firms must respond by utilising more advanced tools to protect themselves against both internal vulnerabilities and rogue individuals. To stay ahead of regulations and competition, investing in state-of-the-art eComms and Trade Surveillance solutions is crucial for a secure and compliant future.

Find the full post here.

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