Preventing and Controlling the Manipulation of Financial Markets: Towards a Definition of ‘Market Manipulation’
| Published date | 01 February 2001 |
| DOI | https://doi.org/10.1108/eb025994 |
| Date | 01 February 2001 |
| Pages | 297-304 |
| Author | Eva Lomnicka |
| Subject Matter | Accounting & finance |
Preventing and Controlling the Manipulation of
Financial Markets: Towards a Definition of
'Market Manipulation'
Eva Lomnicka
Journal of Financial Crime — Vol. 8 No. 4
This paper is intended as a brief introduction to the
topic of financial market manipulation. Although
market manipulation is as old as markets themselves,
the subject is presently generating a great of interest
and discussion. While initially any efforts to prevent
and control market manipulation were nationally
focused,1 the advent of global and interconnected
financial markets has required a reappraisal of such
parochial approaches. In addition, the task has been
made all the more difficult as the opportunities for
market manipulation (and for disguising it) have
increased exponentially with the development of
new technologies for communication and trading
and of ever more ingenious and sophisticated
market practices, often using novel and esoteric
financial instruments.
To start at the national level, the UK already
addresses market manipulation in a number of ways
— including the creation in the mid-1980s of specific
criminal offences.2 The drawbacks of
a
purely crim-
inal approach are well known3 and therefore the
Financial Services and Markets Act 20004 will intro-
duce a new administrative response: the Market
Abuse Regime operated by the Financial Services
Authority (FSA).5 As a matter of terminology, in
the UK the term 'market manipulation' is reserved
for the criminal offences,6 with 'market abuse'
being expressed to cover (a) the misuse of inside
information, (b) behaviour creating 'a false or mis-
leading impression' as to the market and (c) beha-
viour 'distort[ing]' the market.7 However, the latter
two types of behaviour would be regarded as
'market manipulation' in the more general sense
used in this paper. The Market Abuse Regime, in
so far as it covers 'market manipulation' as so
widely interpreted, is referred to further below.
But, as noted above, market manipulation is a phe-
nomenon that transcends national borders. On the
international front, IOSCO8 has begun to address
the problem and in May 2000 its Technical Commit-
tee issued a report on 'Investigating and Prosecuting
Market Manipulation'.9 As with all IOSCO's work,
this aims to inform and stimulate discussion and (it
is hoped) promote cooperation between national
securities regulators and those operating the markets
themselves. It stops short of 'prescrib[ing] the specific
contours of manipulative conduct that are or should
be prohibited'.10 The IOSCO Report has two
useful annexes11 which set out the various laws in
certain different member states, and these demon-
strate the differences in approach to market
manipulation that exist between those jurisdictions
and perhaps explain IOSCO's reluctance to attempt
any harmonisation of them.
At the European level there has also been a recent
flurry of activity — although groundwork was
undertaken over two decades ago with the devising
of a European Code of (Market) Conduct in
1977.12 Thus a Forum Group on Market Manipula-
tion has been set up under the Commission's May
1999 Action Plan13 and the Issues Paper of the first
meeting of the Forum Group14 promises a Market
Manipulation Directive, complementing the Insider
Dealing
Directive,15
by the end of
2003.
These developments, domestic, European and
international, have highlighted a number of obstacles
to the more effective prevention and control of
market manipulation, one of them being a lack of
precision as to the meaning of 'market manipulation'.
WHAT IS 'MARKET MANIPULATION'?
Towards a consensus
There is a large degree of consensus at the general
'macro' level both on what 'market manipulation'
is and on why it should be prohibited. The
common starting point is that market manipulation
is an unwarranted interference in the operation of
ordinary market forces of supply and demand; an
interference in the market's normal price-forming
mechanism. For example, the IOSCO report talks
of ensuring that the 'price is set by the unimpeded
collective judgment of buyers and sellers'16 and the
Journal of Financial Crime
Vol.
8,
No.
4,
2001.
pp.
297-304
© Henry Stewart Publications
ISSN 0969-6458
Page 297
To continue reading
Request your trial