Market Abuse
We had seen this area as being less of a focus over recent years, but recent news – e.g. the Galleon Group - and regulatory rulings have put the spotlight back on insider trading. Why is this? Is it because the fall in equity markets last year meant that some people looked to illegal ways of generating returns, or is it that the greater complexity of modern trading and ways of passing information mean that there is more scope for this type of activity? The answer is probably a mix of both. So what more should be done to address this area as the control of price sensitive information is nothing new for the industry?
Market Abuse Survey
MPI Europe conducted a market wide survey into trends, and potential solutions, for market abuse over recent months. This survey of over 500 senior directors and staff in financial institutions took place against a backdrop of a high level of activity in this area, by the UK Financial Services Authority for insider trading investigations. However, the survey found that those responding to the survey thought that the regulator is not a key driver in this area, beyond providing clarity about the specifics of regulation. Furthermore, the market views insider trading as a systemic risk that is largely immune to tougher regulation, and should be tackled by significant changes in culture, people and technology.
A large majority, over two thirds, of those surveyed were of the opinion that the reasons for market abuse were not confined only to firm specific risks but were actually systemic. Additionally, a similar percentage of those surveyed felt the market as a whole still underestimates both the importance and impact of market abuse. On the impact of people and culture, there was a high level of support to engage more skilled people but also that this increase in skilled staff needs to be combined with changes in corporate culture – reversing the trend from an emphasis on short term results, towards the promotion of a stronger ethical culture. 
There was also a strong consensus that improvements could be made in technology, with those surveyed believing that there should be improvement in applications to detect market abuse, and a slightly lower percentage believing that better applications would help prevent market abuse. This is in line with the finding that 95% of those surveyed who thought that the lack of sufficiently developed tools and techniques contributed to the failure to both correctly identify and manage the risks of market abuse.
We will be posting more detail on our Financial Market Conduct LinkedIn group so if you haven’t already joined just follow this link - join our LinkedIn group - where you can get your copy of the full results summary and keep informed of future updates.
Actions you can take
The UK FSA has taken the lead in putting the focus on insider trading and other forms of market abuse. As John Cant, Managing Director of MPI Europe comments “Whilst the market may not get the freedom in the form of self-regulation in this area – the recent actions of the UK FSA and other regulators have made that clear already – the more significant changes and improvements that institutions make, especially in the key areas of people, culture and technology, the more likely they are to be able to take a proactive approach before a regulator would need to become involved.”