Factors SGX considers in deciding whether to take action against false trading
In 2016, the independent SGX Disciplinary Committee (DC)
heard 3 cases involving 6 Trading Representatives (TRs) who had employed
manipulative practices to create a false market in various securities.
Comments
Tan Boon Gin
22 February 2017
In 2016, the independent SGX Disciplinary Committee (DC) heard 3 cases involving 6 Trading Representatives (TRs) who had employed manipulative practices to create a false market in various securities.
SGX’s regulatory objective is to ensure that each market it operates is fair, orderly and transparent. Rule 13.8.1 of the SGX Securities Trading Rules prohibits a Member or TR from engaging in any act or practice that will create a false or misleading appearance of active trading, or lead to a false market in any securities. Similar provisions are found in Section 197 of the Securities and Futures Act (SFA).
In essence, a false market occurs when there is an active interference in the workings of the genuine forces of market supply and demand such that it presents a distortive effect on the price and/or volume of the securities traded. Such a distortion of price and/or volume jeopardises both the efficiency and integrity of the market and could lead to a loss of investor confidence in the market as a whole.
It is therefore important to make clear to market participants what factors SGX weighs when deciding if trading activities amount to misconduct, or not. Enforcement action meted out for misconduct could either be direct disciplinary action by the exchange, or referral of the case to the independent DC for their consideration and action (if any).
Factors SGX considers when deciding whether to initiate enforcement action:
Whether or not SGX decides to initiate enforcement action depends on a range of considerations including:
i. the duration of the misconduct;
ii. the number of alleged breaches;
iii. whether the misconduct was systemic or indicative of a pattern of non-compliance with the rules;
iv. the amount of any benefit gained or detriment caused as a result of the misconduct; and
v. the impact of the misconduct on the market including whether public confidence in the market may have been damaged.
In other words, SGX adopts a risk-based approach to enforcement: the greater the threat to market integrity, the more likely we are to take action. Conversely, we are less likely to take action against matters that are one-off, isolated or technical breaches that do not significantly distort price or volume.
Ultimately, whether we take action or not, depends on a holistic assessment of all five factors. But as a general rule of thumb, a market participant should be mindful of the potential impact his orders and/or trades may have on the market, particularly in thinly traded securities, when his order and/or traded volume exceeds 30% of the total order or traded volume of the security in the market. A market participant should also take note that we will not hesitate to warn the public of a prolonged false market, through the issuance of a trade with caution alert, if necessary.
In the first case considered by the independent DC, the TR had placed buy orders at as many as 12 price levels, which accounted for as much as 90% of the buy order volume to create an impression of significant demand and imbalance in the order book. The TR deleted these buy orders, without them being filled, once market participants had been induced to enter the marker and enter buy orders that matched the sell orders that the TR had placed on the other side of the order book. In other words, our assessment did not stop at the fact that the TR was layering, as placing orders at multiple price levels is not by itself wrong, but went on to consider whether the way he was layering and his conduct post-layering as a whole created a false market. Details on the case are found here.
In the second case, two TRs pre-arranged cross trades for as long as 10 months to prevent their respective Member firms from force selling their clients’ positions in several securities. The volume of the cross trades accounted for as much as 96% of the market volume on some days. The activities of these two TRs effectively extended the settlement date of their clients' positions. Again our assessment went beyond the fact that the TRs had pre-arranged the trades, but went on to consider whether the way in which the two TRs pre-arranged their trades, the duration and impact of the pre-arrangement as a whole, resulted in the creation of a prolonged false market. An executive summary of the case is found here.
The final case involved a team of 3 TRs who collectively created a false market in the shares of Zhongmin Baihui Retail Group Limited, by executing extensive cross trades among their clients for 8 months to artificially maintain the share price. The trades accounted for 90% of the market volume traded at prices between $1.825 and $1.840. An executive summary of the case is found here.
These unusual trading activities led to SGX issuing a “Trade with Caution” alert on the stock on 5 February 2016.
Conclusion
SGX adopts a holistic and risk-based approach in deciding whether to take enforcement action. Market participants should not jump to the conclusion that we will take action simply because there has been layering, or even pre-arranged trading.
The question ultimately is whether the activity has created a false market and the extent to which prices and volumes may be distorted. We are therefore more likely to take action when orders or trades are disproportionate to the order or traded volumes and trading activity is for an extended duration.
In this regard, it bears repeating that a market participant should be mindful of the impact caused by his trading once his order and/or traded volume exceeds 30% of the total order or traded volume of the security in the market, as well as the duration of his activity, as we will not hesitate to warn the public of a prolonged false market, through the issuance of a trade with caution alert, if necessary.
Tan Boon Gin is the Chief Regulatory Officer at SGX