2 Market abuse
As well as the criminal offence of insider dealing, civil offences have also been created in relation to market abuse. Market abuse is defined as an individual or group of people acting to disadvantage other market investors. The UK Market Abuse Regulation (UK MAR) is the legislation that governs this area. It aims to protect market integrity and enhance confidence in the market. UK MAR includes three core offences:
- insider dealing
- unlawful disclosure of market information
- market manipulation.
Market manipulation includes (but is not limited to) manipulating transactions and disseminating information which gives or is likely to give a false or misleading impression on the supply of, demand for or price of financial instruments.
The Financial Conduct Authority takes enforcement action against market abuse. It can impose a number of penalties including imposing fines and ordering injunctions.
In Activity 2, you will explore different types of market abuse behaviours further.
Activity 2 Market abuse
The purpose of this activity is to help you to understand the nature of different market abuse behaviours.
Using the text boxes provided, explain why the following behaviours might be considered market abuse.
- An employee learns that their company may lose a significant contract with its main customer. The employee then sells their shares, because the loss of the contract is reasonably certain.
Discussion
The employee’s behaviour creates an unfair marketplace because the investor who brought the shares from the employee might not have done so if they had the information about the potential loss of a significant contract.
- A person buys a large number of a particular share near the end of the trading day, aiming to drive the share price higher to improve the performance of their investment.
Discussion
This could give other investors a false or misleading impression of the stock or share price, and it could lead to wrong investment decisions being made by investors.
- An employee finds out that their company is about to become the target of a takeover bid. Before the information is made public, the employee purchases shares in the company because they know that the takeover bid is likely to happen soon. The employee also discloses this inside information to their friends and family.
Discussion
This behaviour also creates an unfair marketplace because the person who sold shares to this employee might not have done so if they had known of the takeover bid. Since the employee disclosed this information to friends and family, they could also potentially profit from the information.
- A person uses a chat room to post information about the takeover of a company which they know to be false or misleading.
Discussion
This behaviour could artificially increase or decrease the share price and it could lead to wrong investment decisions being made by those investors.
- There is movement of an empty cargo ship that is used to transport commodities.
Discussion
This behaviour could create a false impression regarding the supply, demand, price or value of this commodity.