Firms Warned to Act More Responsibly as Regulators Get Tough

Terry Flanagan

With regulators developing more stringent rules for market participants, with heftier fines and even criminal prosecutions, firms need to be ever more vigilant in stamping out suspected verboten behavior.

In the past, few market abuse cases were brought and even fewer were successful but there appears now to be a much greater appetite to investigate and prosecute such cases because of the global financial crisis, which has painted the banking sector in a bad light in the eyes of the general public, and also recent controversies such as the recent Barclays Libor rate scandal.

“The financial industry stands at a crossroads—will it display corporate responsibility, or face a deluge of regulation?” said Philippe Carré, global head of client connectivity of trading and technology firm SunGard’s capital markets business in London, on his Twitter account.

In recent times, the Financial Services Authority, the U.K. watchdog, has raised the bar in terms of fines for cases of market abuse, whether its source resides within its jurisdiction or is based somewhere else in the world.

For example, in August last year a Canadian-controlled online brokerage was fined £8 million for layering London Stock Exchange markets, while in November of the same year a Dubai-based investor was fined £6 million for share price manipulation. In January this year, a U.S. citizen and his hedge fund were fined £7.2 million for market abuse while a trade desk director was fined £65,000 for failing to spot the transactions associated with the above case as suspicious, and the hedge fund surveillance officer was fined £130,000 for his failings to “question and make reasonable inquiries” before the event.

“Whether the regulatory action is a fine or a criminal prosecution, individuals, firms associated with those individuals and the firms themselves that are found guilty are subject to not only financial damage but reputational damage as well,” said Magnus Almqvist, senior compliance expert at SunGard’s Protegent business unit, which provides compliance and surveillance solutions. “Ultimately, they also provide fuel to the movement to clamp down and regulate the whole industry.”

And with the European Securities and Markets Authority (Esma), the pan-European regulator, having recently implemented detailed reforms that have been applied across the whole of the European Union to better monitor algorithmic trading practices such as high-frequency trading, firms are becoming aware that in the current political climate regulators are flexing their muscles to catch people and entities abusing the market.

“As regulators are calling for more strict controls around trading surveillance, firms will need to put robust, cost-efficient solutions in place quickly,” said Nigel Kneafsey, chief executive at Options IT, which provides technology infrastructure to the financial sector.

While firms are being urged that merely complying with the new regulations may not be sufficient in the long run.

“Market participants have to embrace this regulation and work to achieving best practice rather than the bare minimum to assist in providing greater consumer confidence in financial markets,” Matthew Coupe, sales director of Redkite Financial Markets, a provider of real-time market surveillance systems, told Markets Media.

“The growth of high-frequency trading has made it more difficult for traditional market surveillance systems to monitor for market abuse, but Esma’s trading rule is a step in the right direction. The market needs to raise its standards in terms of morally-responsible trading—and regulations such as Esma’s guidelines, as well as the Market Abuse Directive and MiFID II are all working towards this goal.”

Coupe also believes that a firm’s compliance operations should not just be viewed as a department that needs to be there, but, rather, in dealing with all of the new regulations, it protects the brand of the firm.

“Compliance managers [have assumed] a greater corporate responsibility—and, as such, their roles have become more demanding and business-critical. With this increased responsibility comes the benefits of greater importance for the role itself but, with the correct tools in place, a diligent, market-savvy compliance manager will have a more interesting role to play in the market.”

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