Following on from our previous briefing on this case, the Upper Tribunal (UT) has upheld the FCA’s decisions to fine and prohibit three bond traders in connection with spoofing (albeit that the UT concluded that the fines should be reduced for two of the individuals). Key takeaways are set out below but for more details see our Notice in a Nutshell.
This case is a reminder for firms and traders of: (i) the danger of engaging in trading behaviours involving orders on both sides, orders away from the touch and orders which are cancelled before trading; and (ii) the practical difficulties of defending against spoofing allegations and demonstrating intention to trade particularly in a market abuse case taking place so long after the conduct occurred when memories have faded and records such as voice recordings may not be available (the FCA commenced enforcement proceedings more than four years after the trading activity and the Upper Tribunal hearing took place more than eight years after the trading). The decision illustrates that:
- explanations for trading activity will be tested rigorously including by reference to records and experts and any inconsistencies or facts that do not fit will be identified and may undermine credibility;
- even where there are no communications to provide direct evidence of abuse, inferences can be made from other evidence such as trading patterns and coincidences in the timing of trades;
- an unblemished record and the fact that abusive trading is high risk and carries severe consequences will not necessarily be persuasive in terms of convincing the regulator / tribunal that no abuse was intended or occurred.
In terms of practical steps for firms and traders with a view to avoiding these pitfalls:
- Training: Regular practical training is a key defence against market abuse and should include reference to specific trading strategies and elements that are likely to raise queries and could potentially be viewed as indicators of market abuse. Case studies and worked examples can be useful in enhancing understanding of what is permitted. Traders should be encouraged to see training not as a tick box exercise but as a valuable interactive opportunity that may assist in avoiding incidents which could lead to a long investigation and painful consequences.
- Compliance engagement: Trading desks should consider checking any new / novel strategies with compliance before implementing these and should also consider making changes where strategies are not successful as continuing to pursue them in the face of failure may undermine a credible rationale.
- Record-keeping: To the extent practical and proportionate to the risks involved, traders and compliance teams should consider making and keeping records of how and why a particular strategy is being used and why it is believed it to be legitimate.
- Challenge: Firms need to foster an environment in which all those involved in trading activity can and do question strategies, including those engaged in and encouraged by senior managers, and where these are not just assumed to be lawful.
- No news is not necessarily good news: Traders need to be aware that they should not necessarily assume that a lack of alerts or enquiries from compliance means that their activity is compliant. Abusive activity can be difficult to detect and so may not always trigger any red flags or raise any enquiries.
- Investigations: Any concerns or alerts, including those raised by third parties, should be carefully considered by compliance and investigated where appropriate with contemporaneous records kept of any internal discussions as consistency of explanations may be a factor in the event of any regulatory enquiry and internal conclusions may be scrutinised.
If you would like any more information on the issues raised in this blog please do not hesitate to contact the author. For further knowledge resources in this area, please see our dedicated Financial services interventions and investigations hub.