Freaking out about market abuse

Ana Herrero-WallaceThe behavioural economics book, Freakonomics, includes a chapter entitled Why do drug dealers still live with their moms? which talks about ‘foot soldiers’, small street crack dealers in Chicago. These individuals, apparently, have a one in four chance of getting killed and they will be arrested around six times during the course of their ‘careers’. All these statistical consequences just to earn an average of $3.30/ hour – less than they could make working in my local kebab shop! Dealing crack cocaine doesn’t have much in common with market abuse other than the obvious fact that they are both illegal activities.

But, in today’s complex trading landscape, it’s becoming increasingly difficult to spot incidences of market manipulation. It’s difficult to assemble the data needed from all brokers, all venues and the market as a whole. Even the regulators (the likes of the FSA) are not omniscient – they can’t possibly know everything.

Those brokers looking to ‘disguise’ their trading intentions may divide a big order into smaller orders and execute on different venues. While both Regulated Markets (RMs) and MTFs are required to operate effective surveillance systems for the detection of market abuse, how can they be expected to meet their surveillance obligations if they don’t have all the information they need? One venue won’t know if a client executed a similar order on another, nor will it necessarily know the identity of the end client for a particular order. As a result, many of these ‘abusive’ orders remain unflagged.

The issue of market abuse is one of the areas that MiFID II is set to address. The regulation might, for example, enforce standard flags to identify the end client for every order. Unless the industry makes the necessary corrections we will never see a level playing field and one where market abuse has more in common with the risk/return trade-off of the small-time Chicago dealers still living with their mothers!

One Response to “Freaking out about market abuse”
  1. Anne says:

    At the MiFID Forum – Transaction Reporting Subject Group yesterday there was a discussion around ESMA’s proposed introduction of a unique Client Identifier at a National level on transaction reports to combat market abuse. Under MiFID, unique client ids at a firm level were introduced on client side transaction reports, from memory this was a huge undertaking at the time. The FSA representative at the forum was asking how could individuals be identified?

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