Trust Street

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, phishing is entering orders to trade, or a series of orders to trade, in order to uncover orders of other participants, and then entering an order to trade to take advantage of the information obtained. Phishing vs. pinging My interpretation is that phishing is like pinging, but while pinging seeks to obtain information about pending orders in dark pools, phishing seeks to obtain information about pending iceberg orders in light venues. Does phishing exist? I really cannot understand how one participant can make a profit by uncovering iceberg orders (see the 2 examples below). Example 1 In this example, I cannot see how the manipulator can make use of the newly obtained information to make a profit. Ok, now the manipulator and everyone (!) know that there are pending orders to sell 17,000 shares (4,000 more than previously known) at 1.38 € and therefore everyone can buy aga

As a set of ING's clients were facing relevant charges regarding suspicions of money laundering and corruption, the Dutch authorities initiated an investigation, under the name "Houston", regarding ING's anti money laundering (AML) systems and procedures. This investigation identified a set of flaws, namely regarding Customer Due Diligence (CDD), risk classification, client classification and transaction monitoring, leading ING to fail to identify a presumably significant number of money laundering and corruption signals between 2010 and 2016. (I used the word 'presumably' because there is no way to estimate the number of clients nor the amounts involved in money laundering through the use of ING bank accounts). This investigation culminated with ING settling with the Dutch authorities to pay 775 M€. What flaws did the Dutch authorities found in ING's AML systems and procedures? According to the Netherlands Public Prosecution Service (NPPS), I

On 2013 and 2014, a set of financial authorities (including the UK FCA, the US SEC, the Swiss FINMA and the Hong Kong SFC) launched a series of investigations related to trading in the FX market. The trigger to the investigation was the publication of a news article by Bloomberg on 11/Jun/2013 reporting that "traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments". Apparently, this practice had been occurring for several years. It is worth to note that, as in many other financial wrongdoing cases, it was a set of journalists, and not the supervision authorities, who found out about what was happening. What was being manipulated? There were two FX benchmarks being rigged: The 16:00 (UTC) World Market Reuters (WM/R) benchmark – set as the median price of all trades executed in the FX interbank market within a 60 seconds window, from 15:59:30 to 16:00:30; The 14:1

Financial institutions have to have in place solid Anti Money Laundering (AML) frameworks – i.e. adequate policies, procedures, systems and personnel – in order to prevent, detect and report any client using their services (e.g., deposits, transfers, etc.) for the purposes of money laundering and corruption. The Customer Due Diligence (CDD) process is at the core of any AML framework – note that I will be using the EU AML Directive terminology, in which CDD encompasses the customer identification, risk classification and transaction monitoring. It is important to say, nonetheless, that AML goes beyond the CDD process, as it also includes employee training policies, internal risk assessments and internal audits. Find below, a possible generic structure that I set up for AML CDD process at a bank.

The term best execution refers to the legal/regulatory obligation imposed on brokers to make all possible efforts so to provide the best value for their clients when executing orders on their behalf taking into account the prevailing market characteristics. Such value may come from a combination of factors (depending on the market type and/or the client needs), but it mostly implies that brokers have to focus on providing a low (high) purchase (disposal) price, low fees and a high speed of execution (unless explicitly stated otherwise by the client).

In literal terms, a boiler room is a space where salespeople make unsolicited calls to a wide range of potential investors to convince them to buy highly-speculative, fraudulent or even nonexistent securities. (I said "in literal terms" because the salespeople do not need to be in the same room...) These salespeople usually transmit solely positive information about the investment, make false promises of high returns and lie about the investment risks. Simultaneously, they resource to aggressive selling techniques, such as stating that it is an unique opportunity that has to be seized immediately, or that otherwise will be lost. Note that this practice is often executed within a pump and dump scheme, as the manipulators try to convince potential investors to buy a worthless security - with such purchases pumping the price up, to then dump the securities at a high price.

One of the main goals of the MIFID2/MIFIR regulatory package was to increase control and scrutiny over high-frequency trading, in an attempt to decrease the risk of: Disorderly trading (specially flash crashes, but also cases of abnormally high volatility); Trading systems' overloads; High-frequency market manipulation (specially spoofing/layering). (Recall that MIFID2 defines high-frequency trading as a subset of algorithmic trading -  for more information, please check  What is high-frequency trading? ) So, what basically changed with MIFID2/MIFIR? Even though I have not seen any post-MIFID2/MIFIR impact study on these topics, I think it is fair to say that these regulations allowed, at least up to a point, for more oversight, transparency, (algorithm's and algorithm trading system's) resilience and liquidity. However, I think it is also fair to say that these changes, albeit relevant, were not radical. Indeed, many expected MIFID2/MIFIR t

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, creating a floor [ceiling] is whenever a participant makes transactions or enters orders in such a way that obstacles are created to avoid or try to avoid that prices fall below [rise above] a certain level. Who creates floors [ceilings]? Potentially, the usual suspects (executives, employees with stock compensation, large shareholders, port-folio managers, derivative-holders and any other person/entity that can benefit from a change in the security’s price). Which market conditions? I guess it can occur both in illiquid and liquid markets. However, the higher the liquidity, the higher are the necessary volumes to be traded and/or order by the manipulator. Example 1 The manipulator starts buying a security aggressively whenever the price falls close to a certain level (in this case 1.00€). Example 2 The manipulator starts selling a security aggressively whenever the price rises close

When Michael Lewis published the book Flash Boys, a heated and highly-mediatic debate started on whether high frequency traders (HFT) were front running other investors by arriving faster at the available quotes - a form of latency arbitrage. Even a new exchange, the Investors Exchange (IEX) - led by Brad Katsuyama, was founded on the basis of this idea, i.e. under the premises that for markets to be fair such latency advantage should be eliminated. On the other side of the debate, many rose up to advocate in favor of HFT and the exchanges. What is Michael and Brad's thesis? Firstly, some context: In the US, the BBO that is publicly disclosed is an aggregate of the BBO of all US exchanges (apparently 13, when Flash Boys was written), and is called the National BBO or NBBO; Additionally, in the US, whenever a trading order is submitted to one exchange, if it is larger than the volume available at the NBBO in such exchange, it will be redirected to other exchanges so tha

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, quote stuffing is the practice of entering large number of orders messages (entry, modifications and cancellations) so as to create uncertainty for other participants, slowing down their process and/or to camouflage their own strategy.  Note that quote stuffing is frequently referred in the market as the practice of entering orders messages in large numbers so as to slowdown the exchange’s trading system – which differs from the MAR definition. Who quote stuffs? Quote stuffing is done by HFT with the goal of confounding and slowing down other HFT (which have to process a large number of messages, while the manipulator does not – since he/she sent them), in order to: Buy and/or sell at more favorable terms; Exploit arbitrage opportunities (between the underlying security and respective derivative or index); or Camouflage other ongoing manipulative practices. Which market conditions?

One of the goals of the MIFID2/MIFIR regulatory package was to reduce dark trading – both pre-trade darkness and post-trade darkness. Indeed, regulators across the globe have been critical of the growth of such type of trading, as  arguably it does not contribute to price discovery nor to publicly available market liquidity – note that if all dark trading moved into lit platforms, there would be more orders contributing to the public price formation, more displayed liquidity (i.e., narrower bid-ask spreads and higher depths) and more available data on executed transactions (which allow for a better-informed price formation). In addition, some regulators also argue that having no (or limited) pre-transparency requirements for OTC trading creates unfair competition between investment firms (IF) and trading venues (TV), while having no (or limited) post-transparency requirements creates unfair competition between the investors that are knowledgeable about a certain transaction and

Dark pools (or dark pools of liquidity) are trading venues through which institutional investors can anonymously place hidden orders. Illustratively, as the name suggests, dark pools can been seen as markets with no lights where investors cannot see what other investors wish to buy or sell – ie, where there is no pre-trade transparency . (Dark pools may also have limited or no post-trade transparency, but I guess what really matters for the definition of a dark pool is its absence of pre-trade transparency.) Dark pools are used by institutional investors to trade securities in large quantities (commonly known as block trades) without having the strong market impact that it could have if traded at a regular exchange. There are many and various types of dark pools, but frequently a dark pool has its trading prices referenced to the ones (usually the mid-quotes) dealt in a specific regular exchange. Dark pools can be managed by: Independent providers (ex: Liquidnet); Brok

It is debatable whether a market should be fully post-trade transparent, or allow for omissions and/or deferrals in the publication of transaction data – and, if so, to which extent. On the one hand, it can be argued that full post-trade transparency is essential to: Price discovery, and therefore transaction data publication should not be omitted or deferred. Indeed, the way investors value/price a security is not independent of its past prices, which can be considered to be data as important as p.e. financial information about the issuer – a financial market, as any other market, is a social venue in which participants influence each other’s perceptions and actions; Promote a level playing field in trading, as the parties involved in a unpublished transaction have an information advantage when compared to other investors (and by the way, such can arguably be considered inside information). On the other hand, it can be argued that reduced post-trade transparency is ess

Post-trade transparency refers to the publication of data concerning past transactions. A market with full post-trade transparency is a market in which the relevant data – at least, price, volume and date/timestamp – of all transactions is made public immediately after such transactions occurred.  For example, if you or I trade against an order sitting at an order book of a major trading venue (such as Euronext or LSE), the details (price, volume and timestamp) of such transaction will be immediately published. (You and I may not be able to see that data immediately and only with 15 or 20 minutes delay since we do not pay for premium data services, but the professional investment community will.)  As an opposite example, block trades can be executed (even within the rules of major trading venues) without immediate data publication, as such publication can many times be deferred (usually for one day or a few days).

It is debatable whether a market should be fully pre-trade transparent, or allow for omissions in the publication of order data – and, if so, to which extent. On the one hand, it can be argued that full pre-trade transparency is essential to: Publicly displayed liquidity – a higher level of pre-trade transparency means that there is a higher number of displayed orders sitting in the book (i.e., higher order book depth) and potentially a narrower displayed bid-ask spread; Liquidity – displaying orders can attract counterparties to the market (I may only become interested in making a trade after seeing a limit order in the book that suits me);   Price discovery – if all trading interests were publicly displayed, the price formation process would be faster and richer (for every order that is entered with no pre-trade transparency, it is one less order contributing with information to the price formation process). On the other hand, it can be argued that reduced pre-trade

Pre-trade transparency refers to the publication of data concerning orders sitting in the order book. A market with full pre-trade transparency is a market in which the relevant data – at least, price and size (and eventually date/time of the order entry) – of all orders sitting in the book are publicly available.  For example, if you or I wish to trade on a major trading venue (such as Euronext or LSE – in which there is a high level of pre-trade transparency), we can see the price and size of the orders sitting in the book and therefore know what will be the outcome of our order entry (i.e., whether it will be immediately fulfilled or added to the sitting orders). (You and I may only be able to see the best-priced orders sitting in the book since we do not pay for premium data services, but the professional investment community will see all orders.) As an opposite example, block trading venues provide no information regarding the orders sitting in the book, and therefore i

A few years up until 2012, Deutsche Börse's Frankfurt Stock Exchange (FSE), and more precisely its Open Market segment, was the stage for innumerous cases of fraudulent listings and pump and dump . The Open Market, which used to be described by the Deutsche Börse (DB) as a Regulated Unofficial Market, is a FSE market segment for the listing and trading of shares issued by foreign companies and German SME. "Unofficial" stands for the fact that it operates under its own specific rules. The structure and scope of the Open Market changed throughout time since it was created in 1987. However, between 2008 and 2012, it had three sub-segments: the Entry Standard, the First Quotation Board (FQB), and the Second Quotation Board (SQB). According to BaFin's 2011 Annual Report, the Open Market had admission and post-admission requirements that were much more lenient than FSE's Regulated Market, and such requirements were the least stringent for the FQB subsegme

Listing requirements, which encompass both admission requirements and continuing requirements, vary across products and across exchanges. Some common admission requirements are: Having a minimum initial free float (e.g. 25% and/or 500.000 shares); Having a minimum initial market capitalization (e.g. 1 million euros); Having existed for a minimum of years (e.g. 5 years); Having published periodic financial information for a minimum of years (e.g. 3 years); Having a minimum initial stock price (e.g. 2€); Having a minimum number of market makers (e.g. 2); Having a minimum number of independent directors (e.g. more than 50%). Some common continuing requirements are: Paying the respective fees to the exchange; Publishing periodic financial information; Publishing all material information which, when made public, will likely impact the stock price; Publishing corporate actions, and reporting them to the exchange a few days in advance; Maintaining the stock price

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, excessive bid-ask spreads is moving the bid-ask spread to and/or maintaining it at artificial levels, by abusing of market power.  Basically, the manipulator can increase the bid-ask spread by trading against any order that improves the BBO (buying against all the orders entered at the best ask and/or selling against all the orders entered against the best bid). Creating a floor vs. excessive bid-ask spread Excessive bid-ask spread is basically creating a floor for the bid-ask spread (instead of the price). Who makes excessive bid-ask spreads? Market makers (or liquidity providers) – who obviously prefer to mark the market (or provide liquidity) in a high bid-ask spread environment. Example 1 This way, the manipulator can maintain its market maker (or liquidity provider) offering with a 0.05€ spread. Example 2   Whenever the bid-ask spread falls to a certai

The tick size regime was not a competitive issue in Europe until MIFID I came into into force in 2007, as until then the national exchanges had the trading monopoly for the securities they had listed. After MIFID I, the new players started using the tick size regime as a competitive factor, in a so called "race to the bottom": when faced with several venues with different tick sizes for the same security, market participants obviously prefer to trade in the one with the lowest tick size as it provides more flexibility. Although lower tick sizes can have benefits such as allowing for lower bid/ask spreads, if they are excessively low they can also lead to fragmented market depths – very few orders or even only one order for each price level, including at the best bid and best ask – and to an adulteration of the order book's price-time priority scheme – if the tick size is 1/1000000, a participant can place a new order in front of the line without having to make

In order to detect potential marking the auction situations, the trade surveillance system should pop up alerts whenever there is: High price variation in the auction; High participant's volume in the auction as percentage of the total volume in the auction; Additionally (and ideally - as it is not easy to implement), the alerts should only be triggered whenever: The participant's order that led to execution was placed a few moments before the end of auction's accumulation period; The participant's order was placed after the order(s) against it was executed; There is a material difference between the executed price and the price that would have been executed if the participant's order(s) had not be entered. For securities that trade continuously (which usually have two periodic auctions, at the open and close of the session), the alert should also take into account the following: High participant's volume in the auction as percentage of the

In simplistic terms, every investment firm (IF) that uses its own capital to perform high volumes of OTC transactions is obliged under MIFID1 (in relation to shares) and MIFID2 (in relation to a wide range of instruments) to register as a Systematic Internaliser (SI), and is subject to pre-trade transparency requirements (i.e., publish firm quotes). The longer version...  The concept of systematic internalisation was initially introduced by MIFID1 (effective in 2007), by stating that a SI is an "investment firm which, on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF" (Art. 4, n. 1, 7). MIFID2 kept this definition basically unchanged, by stating that a SI is an "investment firm which, on an organized, frequent systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system&q

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, buy, advertise, sell (or as MAR calls it: “opening a position and closing it immediately after its public disclosure”) consists in opening a large position, announcing it as it was a long-term investment, and then closing right afterwards. MAR does not mention it, but I guess that Sell, Advertise, Buy is also market manipulation. Who can buy, advertise and sell? A famous/reputable investor who is followed by other investors; or A person/entity capable of buying [selling] positions that are large enough that they are announced either due to regulatory requirements or just because the financial media finds it to be relevant. Which market conditions? I guess that the market needs to be somewhat liquid – as the manipulator needs the security’s price to react to the news flow (and illiquid securities sometimes do not). Buy, advertise and sell vs. pump and dump In my view, buy, adve