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Notification of Warning: individual trader – market manipulation

The Financial Markets Authority (FMA) has issued a warning to an individual in relation to suspected market manipulation. Following an investigation by the FMA, it concluded that trading by the individual in question has likely breached the Securities Markets Act 1988 (the Act) in the following ways:

  • The individual entered a number of buy and sell orders for a publically listed security, resulting in four trades with no change in beneficial ownership.  Section 11C of the Act creates a presumption of market manipulation where trades are conducted that result in no change in beneficial ownership.
  • An initial sell order placed by the individual exceeded the current best asking price for the shares at the time.  The individual’s trades represented over half of the on-market trading volume for the shares at the time of trading and the trades also resulted in an increase in the market price for the shares.  Section 11B of the Act prohibits acts that have or are likely to have an effect of creating a false or misleading appearance of the extent of active trading in publically issued securities, or the supply, demand, trading price or value of those securities.

The FMA has assessed the conduct involved and notwithstanding its conclusion that the Act has likely been breached, it has determined that the appropriate and proportionate response in this case is to issue a warning to the individual.  Factors specific to this case that were taken into account in making this decision included:

  • The individual was an inexperienced trader and was unaware that trades resulting in no change in beneficial ownership (i.e. trading with yourself) were not permitted.  This is not a defence, but the individual has since sought legal and other professional advice regarding their investment activity.
  • The individual traded using online trading platforms which did not provide any guidance as to permitted or prohibited trading behaviour.
  • The trading occurred over a short period of time and no financial gain was made.
  • The individual co-operated with the FMA during the course of the FMA’s investigation.
  • The individual has confirmed that they are now seeking professional advice with respect to their financial investments and trading.

While the Act does not protect those who engage in market manipulation from liability on the basis of being inexperienced traders or being unaware of the legislative provisions, the FMA considered that this was nonetheless relevant to assessing intention and in determining the appropriate and proportionate regulatory response.

The purpose of the publication of the basis for the warning and the facts involved is to increase awareness of the required conduct around trading of shares in New Zealand’s financial markets. The object of the market manipulation provisions in the Act is to protect and preserve the integrity of the share market against activities which will result in artificial or managed manipulation.  The provisions seek to ensure that the market reflects the forces of genuine supply and demand.  The type of misconduct that the FMA has identified in this case is illustrative of conduct which has potential to have a serious impact on the fairness, efficiency, transparency and development of financial markets.  The conduct may have given a false or misleading appearance of the volume and/or price of the shares in question.

It is important that the FMA takes action that denounces and deters such conduct in order to protect the integrity of the market and to ensure that those who trade are aware of the requirements and consequences.