The U.K.’s finance regulator expects more than 900 reports this year from the industry about suspicious trading, nearly triple the amount in 2009.
The Financial Services Authority doesn’t interpret this as a sign that more market abuse such as insider trading is occurring, said Jamie Symington, the watchdog’s head of wholesale enforcement.
“Rather we think our messaging around the requirement for and importance of market participants submitting STRs is hitting home,” Symington said at a conference in London today, referring to so-called suspicious trade reports.
The FSA’s enforcement division has spent the last four years improving its capacity to combat financial crime. It won convictions against ten people for insider trading this year, the highest ever in England. The regulator has convicted a total of 21 people for the crime since beginning to prosecute it in 2009.
Symington cited a case where a hedge fund’s former compliance officer and a trader at JPMorgan Chase & Co.’s Cazenove unit were fined this year for not reporting a “suspicious order” to the regulator. This came after the fund, Greenlight Capital Inc., sold 11.65 million shares in Punch Taverns Plc. Several days later, Punch announced plans to raise 375 million pounds ($604 million).
Greenlight and its chairman, David Einhorn, were fined 7.2 million pounds in January for trading on inside information about the planned equity sale.
The FSA’s “market cleanliness” measure that aims to gauge insider trading in London equity markets was about 20 percent for 2011, down from some 30 percent in 2009. The regulator calculates the figure by analyzing share price movements in the two day period prior to regulatory announcements and identifying abnormal moves, Symington said.
“We are expecting to see a continuation of that trend, although final data is not yet available,” he said. “It remains too early to draw any firm conclusions from this and the data and methodology has clear weaknesses.”
The regulator has “further automated and enhanced” its review of the transaction data it collects and bought software designed to improve its detection of market abuse, Symington said.
Still, the FSA is seeing more challenges in detecting market abuse because it regulates numerous asset classes where manipulation is possible, such as derivatives, he said.
“There has been a fragmentation of the markets,” Symington said. “The increased use of algorithmic trading and high-frequency trading has made manipulation on very small price movement potentially profitable.”
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