Market abuse is any unlawful behaviour that is intended to disadvantage other players in a qualifying market. This gives the perpetrator an unfair advantage over investors unaware of the misconduct. Market abuse behaviours can include disseminating false information, using non-public inside information to inform trades, distorting pricing mechanisms and other such illegal activity.
Types of market abuse
The Market Abuse Regulation (MAR) outlines three broad categories of market abuse:
Illegal disclosure of confidential information
This refers to the disclosure of material inside information to another individual without authorisation. For example, a CEO discloses to a third party about a potential takeover.
Insider trading
Insider dealing is when an individual with confidential information about a security uses it to buy or sell their holdings. For example, an accountant of a financial firm notices a boost in the company’s quarterly earnings. Since this information is not yet public, using it to buy shares on the understanding they will increase in value when it is reported is considered insider trading.
Market manipulation
Market manipulation is the deliberate attempt of artificially engineering the apparent supply and demand of a financial security to mislead investors. For example, a trader submitting false buy orders in order to give the appearance that a financial instrument is more desirable than it really is.
Potential effects on the market
Market abuse can have a drastic impact on the economy. It limits the full transparency needed to ensure the proper functioning of the financial markets. Market abuse also destroys the confidence of investors in securities and derivatives, leading to less engagement with the markets.
Enforcement
To ensure compliance, firms are required to maintain insider lists to keep track of individuals privy to confidential, material information. They must also maintain a record of all transactions to help determine the circumstances around them and be able to recreate the scenarios if required by legislators. Trade surveillance and data analysis can also be utilised to identify trends in transaction activities. In the EU, market abuse penalties for natural persons can reach up to €5,000,000 and those for legal persons can reach up to €15,000,000 or 15% of the annual turnover.