Recently, ESMA published two consultation papers (CPs) on MAR: 1. draft technical standards on MAR (CP1) and 2. draft technical advice on Commission delegated acts (CP2). The consultation period closes in October 2014.
CP1 contains reference to insider trading, buy-backs and stabilisation, market soundings and other issues on which I won’t focus here.
CP2, however, focuses on clarifying indicators of market manipulation.
In this article, we do not go into details of the important topics, such as potential conflicts between the MAR proposals and MiFID 2, or cross-refer to the actual provisions of MAR (and any comments we may have made before about their likely impact – for example, the notion in MiFID 2 that if one builds, owns and operates an automated trading system that can be used in breach of MAR, then that is a breach of MiFID2). However, it is worthwhile looking at submissions like those found here in which I am happy to confess to having had an interest.
Accepted Market Practices (AMP)*
CP1 states that:
- ESMA believes that AMP should be accepted member State by member State by competent authorities. What is an AMP accepted by one regulator might not be accepted by another
- ESMA would like regulators to provide that AMP could only be implemented by “regulated persons”, although leaves it up to each national regulator to determine whether this will be the case
- AMP should have a positive impact on market liquidity and efficiency and ESMA takes a narrow view of what constitutes “liquidity” (“how quickly a financial instrument can be converted into cash”)
- OTC trading is not, per se, excluded from the AMP regime but national regulators should take care to ensure that AMP in OTC trading satisfy the requirements in MAR
- Orders under an AMP should be entered and recorded separately
- An AMP cannot be ‘accepted’ less than 3 months after the relevant regulator has notified ESMA of its intention to do so and ESMA has 2 months to issue an opinion to the applying regulator as to whether it has concerns about the AMP or wants further information, etc.
* further details on AMP may be found at Article 13 of MAR.
STRs and order reporting
CP1 states that:
- STRs cover orders, cancels, amends and completed transactions
- Firms should make STRs within 2 WEEKS of “reasonable suspicions” being formed about a particular transaction and ESMA would expect that this would normally be within 2 weeks of the transaction itself
- Trading venues are covered by the MAR and STR regime
- “Reasonable suspicion” would normally be reached after some “preliminary analysis”
- All firms should have automated surveillance in place – off-the-shelf products for “a business with a limited dimension” and bespoke systems for “complex and sophisticated entities”
- STRs should be standardised across the EU and Commission provide a standard template for STRs (a draft of which is appended to CP1)
- Firms should keep a record (for 5 years) of all STRs and “near misses” (ESMA has gone to the trouble of asking market participants whether they would like further clarity as to what is a “near miss”. Which is nice!).
Indicators of market manipulation
CP2 proposes that (among many others), the following are indicators of “market abuse”:
- Painting the tape
- Pump and dump
- Trash and cash
- Momentum ignition – now I’m going to define that one (or, more accurately, reproduce ESMA’s definition) because it’s interesting and I’ve bolded some bits – “entering orders to trade or a series of orders to trade, whether or not they are executed, intended to start or exacerbate a trend and to encourage other participants to accelerate or extend the trend in order to create an opportunity to close out/open a position at a favourable price”. [so my reading of that is that it has two parts, both of which must be satisfied: one must have an actual intention to both (a) start/exacerbate a trend and (b) encourage others to accelerate or extend it]
- Cross-venue manipulation of the same instrument
- Marking the close
- Layering and spoofing (ESMA has provided a definition here, too)
- Quote stuffing – and, again, worth noting the actual definition “entering large numbers of orders to trade and/or cancellations and/or updates to orders to trade so as to create uncertainty for other participants, slowing down their process and/or to camouflage their own strategies”. [I’m not sure about this one. I can read it a number of ways – some of which lead me to think that it’s a very low bar to reach to be quote stuffing where there is no intent requirement. Also, must there be actual uncertainty, slowing of processes or camouflaging of strategies? If so, who decides whether this has actually occurred? As to camouflaging strategies … there is a number of standard, exchange-supported order types which are designed to do just that with no malicious intent. How does this sit with dark pools?]
- “Ping orders” (which means “entering small orders to trade in order to ascertain the level of hidden orders and particularly to assess what is resting on a dark platform”). [So … must one actually have to have ascertained the level of hidden orders or must one only need the intention to try to do so?]
- Orders to trade with “no apparent justification” (other than to increase/decrease the price/volume traded) [I don’t really know what to say about this one – how much evidence will one need to prove there is a ‘justification’ for sending an order?]
- High order-to-trade ratios “which may be combined with a high number of instruments per order”.
It is a long, but nonetheless non-exhaustive, list …