Market Manipulation in the UK

Anti-manipulation regulations in the U.K. stem mainly from the E.U.’s Market Abuse Regulation (MAR) No 596/2014, which came into effect in 2016 while the U.K. was still an E.U. member (and therefore continues to has direct application in Britain). MAR was incorporated into U.K. domestic law through amendments made to the Financial Services and Markets Act 2000 (FSMA) and the Financial Services Act 2012 (FSA), and is therefore unaffected by Brexit. Market manipulation can also be targeted with the Fraud Act 2006 (FA) and the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT).

The regulators with primary responsibility over enforcing these laws are the Financial Conduct Authority (FCA), which brings mainly civil enforcement actions, and the Serious Fraud Office (SFO), which focuses on criminal prosecutions, and the Office of Gas and Electricity Markets (Ofgem), which regulates energy markets.

Structure of U.K. Market Regulators

• Financial Conduct Authority (FCA)
  • Remit: Criminal and civil enforcement of FSMA, FSA, FA, REMIT.
  • Jurisdiction: Global.
  • Financial Instruments OTC and exchange traded.
  • Investigatory Arm: Enforcement Division.

• Serious Fraud Office (SFO)
  • Remit: Criminal prosecution of sophisticated economic crimes.
  • Jurisdiction: United Kingdom.
  • Financial Instruments Covered: OTC and exchange traded.
  • Investigatory Arm: In-house investigators, Metropolitan Police, National Crime Agency.

• Ofgem
  • Remit: Civil regulation of REMIT.
  • Jurisdiction:
  • Financial Instruments Covered: Exchange traded.
  • Investigatory Arm: In-house investigators.

E.U.’s Market Abuse Regulation

MAR broadly applies to all financial instruments traded on a regulated market, a multilateral trading facility, and an organised trading facility. It also applies to financial derivative instruments not traded on a formal trading facility (i.e., OTC instruments) whose “price or value depends on or has an effect on the price or value of a financial instrument [traded on a facility], including, but not limited to,credit default swaps and contracts for difference.”¹⁵⁹

MAR Article 15 makes it an offense to engage or attempt to engage in prohibited market manipulation activities. Article 12 defines market manipulation to include:

• “Entering into a transaction which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument, a related spot commodity contract or an auctions product based on emission allowance;”
• “Entering into a transaction placing an order to trade or any other activity or behaviour which affects or is likely to affect the price of one or several financial instruments, a related spot commodity contract or an auctioned product based on emission allowances, which employs a fictitious device or any other form of deception or contrivance;”
• “Transmitting false or misleading information or providing false or misleading inputs in relation to a benchmark where the person who made the transmission or provided the input knew or ought to have known that it was false or misleading, or any other behavior which manipulates the calculation of a benchmark;”
• “The placing of orders to a trading venue, including any cancellation or modification thereof, by any available means of trading, including by electronic means, such as algorithmic and high-frequency trading strategies, and which has [a manipulative effect], by:
  • Disrupting or delaying the functioning of the trading system of the trading venue or being likely to do so;
  • Making it more difficult for other persons to identify genuine orders on the trading system of the trading venue or being likely to do so, including by entering orders which result in the overloading or destabilisation of the order book; or
  • Creating or being likely to create a false or misleading signal about the supply of, or demand for, or price of, a financial instrument, in particular by entering orders to initiate or exacerbate a trend.”

Per FSMA § 123, the FCA may impose a civil penalty on any individual found to have engaged in any of the conduct specified in MAR Article 15. The FCA can also apply to the High Court for an injunction restraining an actual or likely Article 15 violation. Because the U.K. declined to adopt a follow- on E.U. regulation specifying criminal penalties for market manipulation, MAR violations are subject to civil penalties only.¹⁶⁰

Unlike its equivalent in U.S. law, MAR gives market participants certain affirmative defenses to market manipulation. Under Article 13, a person or entity will not be liable for market manipulation if they can establish that the “transaction, order or behaviour” at issue was “carried out for legitimate reasons, and conform[s] with an accepted market practice.”

What is the Financial Services Act 2012?

Whereas FSMA includes only civil penalties for market manipulation, FSA Part 7 allows for such cases to be penalized criminally. The two FSA sections pertaining to market manipulation are Sections 89 and 90.

Section 89 (“Making misleading statements”) makes it “an offense for a person to make a statement or to conceal facts with the intention of inducing another person either to enter into or to refrain from entering into a relevant agreement or to exercise, or refrain from exercising, any rights conferred by a relevant instrument.” The offense is committed if a person (i) knowingly makes a false or misleading statement, (ii) is reckless as to whether his conduct may fraudulently induce another to transact, or (iii) dishonestly conceals material facts.

Section 90 (“Misleading impressions”) makes it “an offense for a person to act or engage in a course of conduct which creates a false or misleading impression as to the market in, or the price or value of, any relevant instruments.” The offense is committed if a person intends to make the impression and intends either to (i) induce another person to acquire, dispose of, subscribe for the investments, or (ii) to make a gain for himself or cause loss to another or to be aware that it is likely to have that result.

An offense under these sections carries a maximum punishment of seven years’ imprisonment and/or an unlimited fine.

FCA Handbook - "Illegally Manipulative"¹⁶¹

The FCA has published guidance that provides additional details on the types of behaviour likely to be flagged as illegally manipulative. ¹⁶¹ In comparison with similar guidance published by the CFTC, the FCA’s is much more comprehensive and specific.

The FCA Handbook notes, for example, that the following conduct involves “false or misleading impressions” to other market participants:

• Buying or selling at the close of market with the effect of misleading investors who act on the basis of closing prices, “other than for legitimate reasons.”
• “Wash trades”—i.e., sales or purchases where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion, “other than for legitimate reasons.”
• “Painting the tape”—i.e., entering into a series of transactions for the purpose of giving the impression of activity or price movement.
• Entering orders at prices which are higher than the previous bid or lower than the previous offer, and withdrawing them before they are executed, in order to give a misleading impression that there is demand or supply at that price.

What’s a “Legitimate Reason”?

Per the above, certain market activity that may be facially manipulative can be permissible as long as it is done for a “legitimate reason.” While the Handbook does not expressly define this term, it does list the factors that indicate conduct is not for a legitimate reason:

• If the trader “has an actuating purpose behind the transaction to induce others to trade in, bid for or to position or move” prices.
• If the trader “has another, illegitimate, reason behind the transactions, bid or order to trade.”
• “If the transaction was executed in a particular way with the purpose of creating a false or misleading impression.”

The Handbook also lists the factors FCA considers indicative of legitimately entered orders:

• “If the transaction is pursuant to a prior legal or regulatory obligation owed to a third party.”
• “If the transaction is executed in a way which takes into account the need for the market or auction platform as a whole to operate fairly and efficiently.”
• “The extent to which the transaction generally opens a new position, so creating an exposure to market risk, rather than closes out a position and so removes market risk.”
• If the transaction complied with the rules of the relevant market about how transactions are to be executed.

What’s a “False or Misleading Impression”?

As in US law, UK market manipulation regulations are concerned with market activities that are likely to misleading other traders. But since nearly all sophisticated market participants routinely engage in strategies specifically designed to conceal their trading interest (and therefore mislead others about the true extent of supply or demand), what exactly constitutes an improperly “false” impression is somewhat unclear.

In the FCA’s view, the following factors are relevant to this determination:

• “The extent to which orders . . . or transactions represent a significant proportion of the daily volume of transactions in the relevant [asset or instrument], in particular when these activities lead to a significant change in the price.”
• “The extent to which orders . . . or transactions undertaken by persons with a significant buying or selling position . . . lead to significant changes in the price of an [security] or related derivative or underlying asset.”
• “Whether transactions undertaken lead to no change in beneficial ownership.”
• “The extent to which orders . . . or transactions include position reversals in a short period and represent a significant proportion of the daily volume of transactions” “and might be associated with significant changes in the price.”
• “The extent to which orders . . . or transactions are concentrated within a short time span in the trading session and lead to a price change which is subsequently reversed.”
• “The extent to which orders . . . change the representation of the best bid or offer prices . . ., or more generally the representation of the order book available to market participants, and are removed before they are executed.”
• “The extent to which orders . . . or transactions are undertaken at or around a specific time when reference prices, settlement prices and valuations are calculated and lead to price changes which have an effect on such prices and valuations.”

Section 2 of the Fraud Act 2006

Under section 2 of the Fraud Act 2006, it is an offence for a person to “dishonestly” make a “false representation,” if they intend, by making the representation, to make a gain for themselves or another, or cause loss to another or expose another to a risk of loss. As set forth in Ivey v Genting Casinos (UK) (trading as Cockfords Club) [2017] UKSC 67, “dishonesty” under section 2 is determined through an objective test that assesses whether a defendant has been dishonest by the standards of an ordinary, reasonable individual with the same knowledge or belief as to the relevant facts. A “representation” is false if it is untrue or misleading and the person making it knows that it is, or might be, untrue or misleading. A “representation” may be express or implied and may be regarded as made if it is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention). A section 2 offense is punishable by a maximum punishment of seven years’ imprisonment and/or an unlimited fine.

Regulation on Wholesale Energy Market integrity and Transparency

The Regulation on Wholesale Energy Market integrity and Transparency (REMIT) is an EU regulation on energy market integrity and transparency. The law came into force in December 2011 (pre-Brexit) and continues to provide a regulatory framework for identifying and penalising market abuse on UK wholesale energy markets. In the U.K., REMIT is enforced by the FCA and the Office of Gas and Electricity Markets (Ofgem).

Article 5 of REMIT prohibits engaging in, or attempting to engage in, wholesale energy markets. Article 2 of REMIT defines market manipulation as:

• (a) entering into any transaction or issuing any order to trade in wholesale energy products which:
  • (i) gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products;
  • (ii) secures or attempts to secure, by a person, or persons acting in collaboration, the price of one or several wholesale energy products at an artificial level, unless the person who entered into the transaction or issued the order to trade establishes that his reasons for doing so are legitimate and that that transaction or order to trade conforms to accepted market practices on the wholesale energy market concerned; or
  • (iii) employs or attempts to employ a fictitious device or any other form of deception or contrivance which gives, or is likely to give, false or misleading signals regarding the supply of, demand for, or price of wholesale energy products.

What is Market Spoofing in the U.K.

As in the U.S., U.K. regulators consider spoofing to be a form of market manipulation whereby a trader places visible non-bona fide orders with the intention to deceive and affect the market price without an intention to execute them. However, there is no statute in Britain that specifically prohibits spoofing by name. Instead, spoofing can be targeted under the relevant provisions of MAR, FSA, FA, or REMIT discussed above.

For cases alleging civil violations of these laws, regulators must prove that the trader’s behaviour created a false or misleading impression in the market (regardless of their intent). In a criminal case, it must be proved that the trader acted with criminal intent and that their behaviour had an actual false or misleading effect on the market. These standards are similar to those applicable to pre-Dodd Frank manipulation actions by the CFTC, and are therefore more stringent than what regulators in the U.S. must prove.

To date, there have been no criminal prosecutions in the U.K. for spoofing. But there have been a number of civil actions targeting spoofing:

Manipulation Involving Cryptocurrencies

As in the U.S., clamping down on manipulation involving cryptocurrencies is a key priority of regulators in the U.K. In a 2019 statement, for example, the FCA said, “A combination of market immaturity, volatility, and a lack of credible information or oversight raises concerns about market integrity, manipulation and insider dealing within cryptoasset markets.” ¹⁶² Cryptocurrencies are seen as particularly susceptible to manipulative schemes for at least four reasons.

• First, cryptocurrency exchanges are relatively new and most have yet to implement formal policies against manipulation or adopt adequate market surveillance methods to detect manipulation.
• Second, because crypto exchanges’ profitability turns on the volume of trades they process, there is a financial incentive to turn a blind eye to manipulation (so as not to drive trading elsewhere).
• Third, since cryptocurrencies are a relatively new and still-developing phenomenon, law enforcement agencies have yet to develop the investigatory tools to effectively monitor crypto trading.
• Fourth, cryptocurrencies are by design anonymous, making it more difficult to trace manipulative activity to any particular actor. ¹⁶³

Despite the inherent risk of crypto manipulation, the FCA has determined that its existing rules do not apply to Bitcoin, Ethereum or similar currencies because they are not listed as a regulated activity in the Financial Services and Markets Act 2000 Order. However, derivative instruments based on cryptocurrencies do arguably fall under existing MAR regulations, but there have been no MAR regulatory actions targeting crypto in the U.K. to date. The FCA is currently working with Britain’s finance minister to create a more definitive framework for crypto regulation in the near future.

Extraterritorial Application

The law of England & Wales requires offenses to be tried only in the jurisdiction in which they take place, unless there is a specific provision to ground jurisdiction in the relevant statute. For offenses that may multiple jurisdictions, the common law position is that the offense must have a “substantial connection” to England or Wales in order for their courts to have jurisdiction. As such, where a substantial number of the activities constituting a crime takes place within England or Wales, courts in these countries have jurisdiction unless it can be argued, on a reasonable view, that that the conduct ought to be dealt with by the courts of another country. ¹⁶⁴

While this rule is similar to the Morrison “conduct and effects” test used in the U.S., in practice, the extraterritorial reach of U.K. domestic law is much more limited than in the U.S. and U.K. regulators have shown far greater reluctance to target overseas defendants for market manipulation offenses.

A Primer on Market Manipulation Regulations in the U.S. and U.K." by author by Rahman Ravelli.
Chapter.1 - What is Market Manipulation?
Chapter.2 - Market Manipulation under Federal US Law.
Chapter.3 - Market Manipulation in the UK.
Download the complete PDF guide .

• 159 FCA, “Market Abuse Regulation,” https://www.fca.org.uk/markets/market-abuse/regulation. A “contract for difference” (CFD) is an “an agreement between a customer and a financial institution where the difference in the value of a specified asset at the beginning and end of the contract is exchanged.” CFDs are roughly equivalent to a futures contract in the U.S.
• 160 The provisions of MAR were supplemented by the Directive on Criminal Sanctions for Market Abuse (2014/57/EU) and Regulation (EU) No 596/2014. Together, these provisions specify criminal penalties applicable to market manipulation and insider dealing, and strengthen national regulators’ investigative powers to detect abuses on financial markets. Since these provisions were scheduled to take effect in July 2016, after the U.K.’s vote to leave the E.U., they were not incorporated into U.K. law and therefore will not be considered in this overview.
• 161 FCA Handbook, available at https://www.handbook.fca.org.uk/handbook/MAR/1/6.html?date=2016-03-07.
• 162 Huw Jones & Tom Wilson, “UK watchdog warns of perils of unregulated cryptocurrencies,” R EUTERS (July 31, 2019).
• 163 Anirudh Dhawan & Talis Putnins, A new wolf in town? Pump-and-dump manipulation in cryptocurrency markets (Nov. 17, 2020), https://ssrn.com/abstract=3670714.
• 164 R v Smith (Wallace Duncan) (No. 4) [2004] 3 WLR 229, per Lord Chief Justice Woolf.