On 19 March 2008, the Financial Services Authority (FSA) confirmed that it would be conducting an investigation into trading in HBOS following a sharp fall in its share price. The following statement outlines the background to the FSA investigation into trading in HBOS shares during the period under review and the conclusions reached.
Description of events of 19 March 2008
During the recent turbulence in the credit markets, there has been a lot of speculation in the press and elsewhere about banks which might be facing difficulties in obtaining funding. The pessimistic 'chatter' amongst commentators heightened after the events which led up to the emergency sale of Bear Stearns during the week ending Friday 15/16 March 2008.
On Tuesday, 18 March 2008 the HBOS share price closed at 480p. Prior to market opening and throughout the morning of Wednesday 19 March 2008, various rumours circulated in the market that a British bank faced funding difficulties. Several of the rumours identified HBOS by name: they contended that the Governor of the Bank of England had cancelled his Easter travel plans in order to resolve a liquidity problem at HBOS; and/or that the Bank of England was “bailing out” HBOS.
Following the opening of the market at 8:00am the HBOS share price initially rose two pence despite the rumours. However, the share price started to fall from 8:30am and this fall accelerated sharply from 8:40am until an automated trading halt was hit at 8:43am with the share price at 440p. When trading recommenced at 8:49am, the share price fell dramatically, hitting 398p at 8:52am - a fall of over 17% from the previous day's close. After this precipitous fall, the HBOS share price recovered quickly to 439p by 8:55am and ended the day at 446p – a fall of just over 7% from the previous day’s closing price.
HBOS, the Bank of England and the FSA all made public statements during the course of the day. HBOS made a statement that the bank had an 'exceptionally strong balance sheet'. News agencies were reporting the Bank of England’s denial that it had cancelled leave for its Monetary Policy Committee members. The FSA warned market participants against spreading false rumours and dealing on the back of them.
Many market commentators speculated, often by reference to allegedly specific e-mails and messages, that the fall in the HBOS share price was the result of unscrupulous traders who spread false rumours to make unjustified profits, having earlier short sold the shares.
FSA investigation
On the afternoon of 19 March 2008, FSA staff from Enforcement, Markets, Supervision and Intelligence began to analyse trading in HBOS and to contact market participants and news organisations to determine whether a person or persons might have spread misleading, false or deceptive information regarding HBOS to profit from a reduction in its share price. During the course of the investigation, FSA staff also interviewed a number of market participants at investment banks, broker dealers and hedge funds – including traders, senior management and compliance staff. Our Market Monitoring team reconstructed segments of the order book, scrutinised trading records relating to HBOS shares and derivative instruments, analysed market transaction data for all HBOS instruments including OTC derivative instruments through our centralised transaction monitoring database and reviewed e-mails and messages – including taking steps to verify any specific e-mails and messages highlighted by market commentators. We also looked at message boards and reconstructed global press coverage of HBOS during the relevant period. This information allowed our investigation to view the development of the rumours over time and assess their impact on market sentiment, the market’s response to the rumours and the factors contributing to the movement in the HBOS share price on the day. The investigation has now concluded.
At the time the HBOS rumours circulated there were very uncertain market conditions in relation to the UK banking sector. This, coupled with the news regarding Bear Stearns the previous weekend, meant that traders and other market participants were very actively monitoring their positions in UK banking stocks (and were prepared to give credence to, and act on, negative market information). There is no doubt that false and damaging rumours were circulating about HBOS on 19 March 2008 and these would have had some impact on HBOS’ share price. It is difficult, however, to say how much impact, as the share price was also affected by the interaction of a number of other complex factors on the day, including:
- A lack of liquidity in the order book with parties unwilling to enter buy or sell orders, particularly after the automated trading halt; and
- The effect of algorithmic trading strategies, which amplified the impact of the initial downward trend in the HBOS share price.
Despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price.
Further work
Current market conditions mean it is imperative that the FSA reacts quickly to any potential abuse of the market. This will not always uncover evidence of market abuse nor lead to enforcement action. Market participants should, however, expect that our surveillance and investigation activity will continue at a high level of intensity. Where individuals or firms appear to have benefited following false or misleading rumours, we will require individuals and/or firms to provide immediate access to traders, information and trading strategies as well as to make available email, messaging and telephone records. Where there is evidence of market abuse then we will take enforcement – including criminal – action.
We are also following up the wider issues which the HBOS rumour case has highlighted through our ongoing thematic and supervisory work. In particular, Markets Division has launched a review of the systems and controls at firms for dealing with rumours. Specifically, we are examining what policies are in place and how firms ensure compliance with them; whether and how rumours are verified; whether traders are permitted to pass on or trade on rumours; and how firms ensure staff do not initiate or spread false rumours. This exercise is covering a range of investment banks, securities firms and hedge fund managers. We will communicate our findings to the market in the early autumn.
Background
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.
