Market AbuseEasy

Two prohibitions, one purpose: a price is only worth reading if it was set by people trading on what they believe, using information everybody could have. Abuse is the set of ways that stops being true.

7 min read · 1 282 words

What the rules are protecting

The intuitive account of market abuse is that somebody made money unfairly and somebody else lost it. That account is popular, it is emotionally satisfying, and it explains the rules badly — because a great deal of ordinary trading transfers money from one party to another and none of it is prohibited.

The rules are protecting something narrower and more structural: the price as a piece of information. A market price is useful to everyone — including people who never trade — because it aggregates what participants believe, from information they were all entitled to have. Two things destroy that. Trading on information the market has not got makes the price a transfer from the uninformed to the informed rather than a signal. Deliberately creating a false impression makes the price a statement about somebody's intention rather than about the asset.

So the framework has two prohibitions, and understanding that they answer one question is what makes the details make sense. The other side of the trade covers who is on the far side of an ordinary transaction, which is the baseline all of this is measured against.

Insider dealing: the three parts of the test

Inside information is usually defined by four cumulative conditions, and all four have to hold at once:

• Precise. A set of circumstances that exists or may reasonably be expected to come into existence, specific enough to support a conclusion about the likely price effect. A general sense that things are going well is not inside information.
• Not public. Not disclosed to the market. Analysis assembled from public sources — however clever, however non-obvious — is not inside information, and this is the distinction the mosaic of public research depends on.
• Relating to an issuer or an instrument, directly or indirectly. Information about a large pending order can qualify, which is why front-running a client is an insider offence and not merely a conduct failure.
• Price-sensitive. A reasonable investor would be likely to use it as part of the basis of a decision.

Three prohibited acts follow: dealing on it, recommending or inducing someone else to deal, and unlawfully disclosing it. The second and third catch the cases where the person with the information never trades — which is where most real enforcement sits, because the trade is easy to see and the conversation is not.

Note what is not in the test: profit. Dealing on inside information and losing money is still dealing on inside information. The prohibition is on the use of the information, not on the outcome, and that follows directly from what the rules are protecting.

Manipulation: the recognised patterns

Manipulation is harder to define than insider dealing because the prohibited conduct and ordinary trading look identical from outside — the difference is intention, and intention has to be inferred from pattern. The patterns supervisors describe are worth knowing as mechanisms:

• Spoofing and layering — entering orders with no intention of executing them, to create an impression of pressure on one side of the book, then trading against the reaction. The tell is a cancellation rate wildly out of line with execution.
• Wash trades and matched orders — trading with yourself, or with a counterparty by arrangement, to manufacture volume without transferring risk. Volume is read as interest, so fake volume is a false signal in the most literal sense.
• Marking the close — trading into a closing auction to move a settlement price that something else references: a fund's published value, a derivative's payoff, a fee calculation. Small size, large effect, because the reference is a single moment.
• Cornering and squeezing — acquiring control of the deliverable supply so that anybody short has to buy from you at your price. This one is mechanical rather than informational, and it is the pattern behind the LME nickel episode of 2022.
• Dissemination — spreading information likely to give a false impression, including through media and social channels, particularly where a position is held and undisclosed.
• Benchmark manipulation — influencing an input to a published reference rate. This is why reference rates moved from survey submissions towards rates computed from actual transactions; curve construction covers what those rates then feed.

Two things this list is not. It is not a claim that any named firm did any of it — the case studies on this site say what happened publicly and in what year. And a large price move is not evidence of manipulation: markets move because somebody had to trade, which reading a market number sets out at length.

How firms are built around this

• Information barriers. A bank advising on a takeover holds precise, non-public, price-sensitive information; the same bank has a trading floor and a research department. The barrier is a physical, systems and supervisory separation between the side that holds deal information and the side that faces the market. It is why the M&A desk and the trading desk are separate in more than reporting lines.
• Wall crossing. Bringing a person on the public side over the barrier deliberately and on a record: they are told, they are restricted, and they know they are restricted. The alternative — information leaking without anybody being marked as knowing — is the situation the whole structure exists to prevent.
• Insider lists and restricted lists. Who knows, from when. A restricted list stops the firm dealing or publishing in a name at all; a watch list is confidential and used for surveillance rather than blocking.
• Personal account dealing rules. Pre-clearance, holding periods, prohibited names. Aimed at the employee rather than the firm's book.
• Surveillance. Automated pattern detection over orders and trades, plus communications review. It generates a large number of alerts, almost all of which are explained; the compliance seat is where they are worked.
• Suspicious transaction and order reporting. The obligation runs to orders as well as trades, which is what makes spoofing reportable at all: nothing executed, and still a reportable pattern.

The disclosure side of the same rule

If trading on non-public price-sensitive information is prohibited, the corresponding duty is to make it public. An issuer must disclose inside information as soon as possible, and may delay only in defined circumstances — a legitimate interest in delaying, no likelihood of misleading the public, and confidentiality actually maintained. That third condition is why a leak during a delay converts a permitted delay into an immediate disclosure obligation.

Managers' transactions in their own issuer's instruments are notified and published, and there are closed periods before results. Investor relations is the seat that operates all of this, and if the bank is quoting you covers the corporate side of the same conversation.

What this page is and is not

This describes how the prohibitions are structured and why they take the shape they do. It is not legal advice, definitions differ between jurisdictions in ways that matter to a real situation, and nothing here characterises the conduct of any named person or firm. Anybody facing an actual question about a real transaction needs a lawyer in the relevant jurisdiction rather than a page on a website — see the disclaimer.

What to take away

• The rules protect the price as information, not the loser of a particular trade.
• Inside information is precise, non-public, related to an issuer or instrument, and price-sensitive — all four at once.
• Dealing, recommending and disclosing are three separate prohibited acts, and profit is not part of the test.
• Manipulation is recognised by pattern because the conduct and ordinary trading look the same from outside.
• Information barriers, wall crossing, insider lists and order-level surveillance are the structures firms are built around to comply.