FCA’s Mark Steward looks at market abuse, short-selling and the rise of the retail investor

On 25 February 2021, Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA delivered a speech on efforts to counter market abuse during Covid-19. We look at some of the key messages and the implications for firms.

Delivered via videoconference to the audience at the Expert Forum: Market Abuse 2021, Steward’s speech contained important points for firms about the FCA’s data and approach to short-selling, and the notable rise in 2020 in trading accounts opened by retail investors.

Volumes and Suspicious Transaction and Order Reports (STORs)
Steward noted an increase of 34% in transactions and transaction reports in 2020, which seems to have been largely a result of heavier trading in the first lockdown as investors tried to adjust their portfolios in light of the pandemic. STORs fell during that first lockdown, before then returning to normal levels later in the year. Steward explained that this may have reflected a reduction in market abuse opportunities in a pandemic-focused market. Steward also noted that this perhaps reflected the compliance challenges of adjusting to working from home.

Interestingly, Steward said that he saw the importance of STORs as not just identifying suspicious transactions, but for the message that they send that it is not only the FCA that is looking out for market abuse. This should not impact on firms’ approach to addressing STORs, which should focus on quality, as well as quantity, but is important context to the STOR regime.

Market monitoring and short positions
Steward also referred to advances achieved by the FCA in the reporting of short positions through the FCA’s Electronic Submission System (ESS). Steward noted that this new system of reporting gives the FCA a much better insight into short-selling positions. Two important points came out of Steward’s discussion of shorting during the Gamestop incident: one on the FCA’s view of shorting, and the other on the increase in retail trading accounts.

Steward noted, expressly not commenting on the Gamestop incident, that abusive shorting can lead to distortions in a market, especially when there is insufficient cover and the inevitable squeeze opportunities arise. Those with short positions should thus take note that the FCA has the data, and seemingly the inclination, to scrutinise short positions carefully.

Prompted by the Gamestop incident, Steward considered the rise in retail trading accounts in the UK during 2020. Steward noted in particular the risk that new retail investors could be subject to misleading online marketing. This suggests that firms looking to engage with this new wave of retail traders, and win their custom, will have to ensure robust compliance systems are in place, particularly in ensuring appropriate product governance when developing new products and on an ongoing basis. It may be the case that the FCA and other regulators, which have historically focussed on particular populations of retail customers such as pensioners and mortgage holders, will have to expand their focus to younger tech-savvy (but not necessarily markets-savvy) retail investors.

Cleanliness and enforcement
Steward recapped details of the Potentially Anomalous Trading Ratio (PATR), which was published in September 2020. This focuses on underlying trading behaviour around specified price sensitive announcements and assesses whether the behaviour is anomalous. As these automated systems mature, they should in theory become more effective at identifying market abuse, but there is still scope for automated monitoring to misread circumstances. Steward maintained the FCA’s message to firms that they must ensure discipline when it comes to the identification and management of inside information, and to trading around particular events.

Finally, turning to enforcement, Steward considered key recent cases over the last year. Of particular interest is the Abbattista case, where the FCA fined and prohibited a hedge fund manager for committing market manipulation for placing orders which the FCA considered he did not intend to execute which gave false/misleading signals to the market. The FCA rejected Abbattista’s explanation that this was a trading strategy to identify hidden liquidity in order to gain market intelligence and that he was prepared to execute any order that he placed on the market. Abbattista made and then withdrew a reference to the Upper Tribunal and was issued with a Final Notice in December 2020.