The Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine Swift Trade, a non-FSA authorised Canadian company with global operations, £8m for market abuse.
The Tribunal described this as being "as serious a case of market abuse of its kind as might be imagined".
The FSA said between 1 January 2007 and 4 January 2008, Swift Trade engaged in a systematic and deliberate form of manipulative trading known as "layering".
The manipulative trading caused a succession of small price movements in a wide range of individual shares on the London Stock Exchange (LSE) from which Swift Trade made substantial profits.
The trading was widespread and repeated on many occasions involving tens of thousands of orders by many individual traders sometimes acting in concert with each other across many locations worldwide.
The trading led to a false or misleading impression of supply and demand and an artificial share price in the shares they traded which was to the detriment of other market participants.
The FSA said it believed such conduct, if unchecked, could undermine market confidence.
Further, in March 2007, when Swift Trade became aware that the LSE had raised concerns about its trading activity it actively sought to evade restrictions on its trading by refining its trading pattern to avoid detection.
Swift Trade said it would impose effective controls on its trading but, in fact, took further steps to avoid regulatory scrutiny by changing its Direct Market Access (DMA) provider.
DMA is a service offered by some stockbrokers who are exchange member firms that enables investors to place buy and sell orders directly on the order book.
The Tribunal concluded that the FSA had proved its case that Swift Trade had engaged in layering activity which constituted market abuse.
It said the trading was deliberate, manipulative and designed to deceive other market users and that Swift Trade was successful in that aim.
The Tribunal described Swift Trade's conduct as a cynical course of intensive manipulation of the LSE which was designed to conceal what it was doing from regulators and to escape the consequences of its actions.
Tracey McDermott, FSA director of enforcement and financial crime said:"We urge other market participants to take note of this judgment which makes it clear that layering is abusive. We expect brokers and DMA providers to ensure that their clients implement appropriate controls to monitor their clients' trading activity closely to ensure that it is not abusive, and to report suspicious transactions."
Swift Trade had argued that its trading was not market abuse because its orders were not in shares but in derivatives (CFDs or swaps) which were hedged in corresponding orders in shares on the LSE.
The Tribunal dismissed this argument as contrary to common sense and market practice, and was satisfied that the derivative orders were placed in the knowledge and expectation that the DMA providers would immediately and automatically match them with hedging orders in shares.
Swift Trade also argued that it was not responsible for the activities of traders in its network and that the traders made their own trading decisions.
The Tribunal accepted the FSA's case that the traders were acting as part of the Swift Trade organisation and in accordance with a strategy of which Swift Trade was not only well aware but which it devised and encouraged.
The Tribunal rejected Swift Trade's argument that it had, or could reasonably have thought that it had, grounds for believing that its conduct was not abusive, which could have led to a defence under s.123(2) FSMA.
The Tribunal concluded that the evidence pointed very much to the conclusion that Swift Trade's officers and managers knew very well that its conduct was not legitimate and that, far from taking steps to prevent such conduct, they actively encouraged it.
Peter Beck, the president and CEO of Swift Trade, also challenged the FSA's decision on the basis that he was prejudicially identified in the decision notice.
The Tribunal dismissed his reference, noting that Beck's interests did not differ materially from those of Swift Trade.
Simon Morris, regulatory partner with law firm CMS Cameron McKenna, said of the case: "Such blatant buccaneering market abuse by a fringe player is an easy target for the FSA.
"But it is also gaining a reputation as a regulator prepared to tackle the complex and difficult cases involving bigger names. This augurs well for its imminent reincarnation as the Financial Conduct Authority with an express focus on clean markets."
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