UK's Financial Services Authority Decides To Fine Firm £8m For Market Abuse

The Financial Services Authority (FSA) has today published a decision notice for Swift Trade Inc (Swift Trade) indicating that it has decided to fine Swift Trade £8m for market abuse.

Swift Trade has referred the matter to the Upper Tribunal (the Tribunal) where it and the FSA will present their case. The Tribunal will then determine the appropriate action for the FSA to take.  The Tribunal may uphold, vary or cancel the FSA’s decision.  The Tribunal’s decision will be made public on its website.

In the decision notice dated 6 May 2011, the FSA set out its decision to fine Swift Trade, a non FSA authorised Canadian company with global operations, for systematically and deliberately engaging in a form of manipulative trading known as “layering”.

In the FSA’s opinion, between 1 January 2007 and 4 January 2008, Swift Trade’s manipulative trading caused a succession of small price movements in a wide range of individual shares on the London Stock Exchange (LSE) from which Swift Trade made substantial profits. It has not been possible to measure Swift Trade’s profits precisely; however, they were in excess of £1.75m.

The decision notice states that the FSA believes that this was a particularly serious case of market abuse. It was widespread and repeated on many occasions involving tens of thousands of trading orders by many individual traders sometimes acting in concert with each other across many locations worldwide. The trading led to a false or misleading impression of supply and demand and an artificial share price in the shares they traded which was to the detriment of other market participants.  The FSA believes that such conduct, if unchecked, could undermine market confidence.

Further, in March 2007, it is the FSA’s opinion that when Swift Trade became aware that the LSE had raised concerns about its trading activity it actively sought to evade restrictions on its trading by refining its trading pattern to avoid detection. Swift Trade said it would impose effective controls on its trading but in fact took further steps to avoid regulatory scrutiny by changing its Direct Market Access (DMA) provider. DMA is a service offered by some stockbrokers who are exchange member firms that enables investors to place buy and sell orders directly on the order book.

The FSA believes the size of the proposed fine reflects the serious nature of the market abuse and should act as a deterrent to other market participants.

Tracey McDermott, acting FSA director of enforcement and financial crime said:

“The FSA remains committed to tackling abuse of the UK markets - wherever it originates. Interference with the price formation process threatens the integrity of those markets.

“Market participants who offer direct market access should be aware of the risks that such access may be abused and take proactive steps to prevent it.”

Swift Trade and its President and CEO, Peter Beck, have commenced judicial review proceedings to challenge the FSA’s decision made on 11 May 2011 to publish the decision notice.  These proceedings are ongoing.  They also obtained a High Court injunction on 9 June 2011 to restrain publication of the decision notice.  That injunction lapsed on 16 August 2011 following the Tribunal’s decision dated 2 August 2011 that rejected an application for prohibition of publication of the decision notice.  On 26 August 2011, the High Court dismissed a further application for an interim injunction to restrain the FSA from publishing the decision notice. 

On 13 December 2010 Swift Trade was voluntarily dissolved under Canadian law after changing its name to 7722656 Canada Inc and its remaining assets were transferred to a former holding company, BRMS Holdings Inc. Any creditor’s claims including fines levied by the FSA would be paid out of these funds.  Despite the dissolution of Swift Trade the FSA’s legal proceedings against Swift Trade will continue as if Swift Trade had not been dissolved. 

The FSA has liaised with other regulators worldwide and with the LSE in bringing this action and acknowledges their assistance.

Background

1. The decision notice for Swift Trade can be found on the FSA website.  Peter Beck, the majority shareholder and a director of Swift Trade, was also identified in the decision notice.
2. Layering involves entering relatively large orders on one side of the LSE order book, which has the effect of moving the share price as the market adjusts to the fact that there has been an apparent shift in the balance of supply and demand. This is then followed by a trade on the opposite side of the order book which takes advantage of, and profits from, the share price movement. This is in turn followed by a rapid deletion of the large orders which have been entered in order to cause the movement in price, and by a repetition of this behaviour in reverse on the other side of the order book. Swift Trade placed the large orders in order to give a false and misleading impression of supply and demand. The large orders were not intended to be traded. They were carefully placed close enough to the touch price (i.e. the best bid and offer prevailing in the market at the time) to give a false and misleading impression of supply and demand, but far enough away to minimise the risk that they would be traded. The trading activity caused many individual share prices to be positioned at an artificial level, from which Swift Trade profited directly.  The Decision Notice contains a worked example of layering, with charts illustrating the activity, at Appendix 1.
3. The Tribunal’s decision dated 2 August 2011 has been made public on the Tribunal’s website and the Tribunal’s decision on the referral by Swift Trade will be published in due course. 
4. In April 2010 the Financial Services Act 2010 amended section 391 of the Financial Services and Markets Act 2000 giving the FSA the power to publish decision notices. This power was then activated in October 2010.
5. The FSA’s approach to publish decision notices was explained in Policy Statement 11/3, published in January 2011.
6. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.