Between September and December 2001 Fearnley systematically registered buy orders in the trading system on behalf of the Fund Manager which differed materially from the last registered "best bid". A total of 69 such orders were identified by the market surveillance system at Oslo Børs. The orders in question were small, typically for a single round lot, and related to the shares of five relatively illiquid companies, appr. 15.30 each day. At the time the orders were registered, the Fund Manager held sizeable positions in the companies in question. Moreover all the orders in question were input to the trading system by the same individual broker at Fearnley. The existence of these orders caused a material change in the "best bid" shown by the official bid price in the trading system.
The Board of Oslo Børs is of the view that even though the orders were registered at a price within the bid-offer spread, they did not properly reflect the actual market value of the shares in question. The Board formed the view that the Fund Managers main objective in registering these orders was to change the official bid price rather than to carry out a trade. If the Fund Manager objective had, in fact, been to purchase a single round lot it would have made little difference to the sum involved to match the best offer price registered in the trading system. Moreover the Board takes the view that Fearnley, in the person of the broker in question, must have understood that the Fund Managers main intention with the registration of buy orders was to move the best bid price. In such a situation the broker is required to exercise due care by making appropriate enquiries and refusing to register such orders in the trading system. The Board is of the view that the broker did not make the necessary enquiries, but simply relied on the Fund Managers position as a major player in the market. The Board wishes to stress that the duty placed on a member to exercise due care in such a situation does not differ in any way when dealing with large, reputable clients rather than when dealing with any other client. In such a situation the member will be held responsible for failing to exercise the necessary level of due care. By failing to exercise the necessary level of due care the member in this case caused orders to be published that were in breach of Section 13-3, second paragraph, of the Stock Exchange Regulations.
The Fund Managers role in this matter has been considered by Kredittilsynet (the Banking, Insurance and Securities Commission), which criticised their method of trading in this respect in a letter to the Fund Manager in April this year.
In determining the quantum of the violation charge the Board paid particular attention to the fact that the orders were registered in a way that made it difficult for Oslo Børs to identify the breaches. The Board also took into account the need for Oslo Børs to have full confidence in its members in respect of the compliance requirements that apply to the registration of orders in the trading system. The relationship between Oslo Børs and its members plays a very important role in ensuring an efficient securities market. In view of the serious nature of the matter and in order to discourage any repetition the Board found it appropriate to impose a violation charge of NOK 750,000 on Fearnley.
This decision may be appealed to the Oslo Børs Appeals Committee. Any appeal must be submitted within two weeks.
