Trust Street

Front-running is used to describe a situation in which someone, being aware that a large non-publicized buy (sell) order that may influence positively (negatively) the market price is about to be entered, buys (sells) in advance to benefit from such positive (negative) market impact. Similarly, the term front running is also frequently used to describe a situation in which someone, being aware that a research report that may influence positively (negatively) the market price is about to be published, buys (sells) in advance to benefit from such positive (negative) market impact. Basically, front running is really a form of insider trading, as the information about the plan to place an order or the plan to publish a research report is a form of inside information. Who can front-run? Any investment firm dealing on behalf of clients, in the case of trade front-running. And any investment firm publishing influential research reports, in the case of research front-running. ...

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, smoking is posting orders to trade, to attract other market participants employing traditional trading techniques (‘slow traders’), that are then rapidly revised onto less generous terms, hoping to execute profitably against the incoming flow of ‘slow traders’ orders to trade. Does smoking exist? I am not sure how often smoking happens nor how easy it is to do… It actually seems quite hard to get the timings right… Thus, I end up questioning myself: does anyone actually do smoking? Or is it something that looks well on paper but does not happen in practice? Who can smoke (assuming that smoking exists)? The manipulators are high-frequency traders, trying to make a profit out of slow traders. We are talking about a form of market manipulation that is really fast and leads to tiny profits (therefore, frequency is necessary for the smoker to make relevant gains). Which market conditions...

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, doing an abusive squeeze is taking advantage of the significant influence of a dominant position over the supply of, or demand for, or delivery mechanisms, in order to materially distort, or likely to distort, the prices at which other parties have to deliver, take delivery or defer delivery in order to satisfy their obligations. Basically, a squeeze is when significant constraints in supply [demand] or in other relevant market factor that affects liquidity and pricing (p.e., storage) leads to a sudden drastic buying [selling] at higher and higher [lower and lower] prices. And, an abusive squeeze is when someone causes a squeeze on purpose to profit from it. Abusive squeezes are not that frequent, since: They require the manipulator to have a dominant position in the supply or demand (which usually requires applying significant amounts of money); and Even if the manipulator has the proper...

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, marking the close is the act of buying or selling a financial instrument deliberately, at the reference time of the trading session (e.g. opening, closing, settlement) in an effort to increase, to decrease or to maintain the reference price (e.g. opening price, closing price, settlement price) at a specific level. Note that MAR uses the term 'marking the close' in a broad sense, comprising all forms of 'marking a reference price'. Here, I will focus on 'marking an auction price'. Motives The motives for marking an auction price are pretty much self-explanatory if we consider that an opening price can serve as a reference for the rest of the trading session (if the security is not traded continuously, it still may set a reference for the closing auction), while a closing price can serve as a reference for the subsequent trading day and for a wide of idiosyncratic purp...

With MIFID II (Art. 16, no. 6 and 7), EU investment firms became obliged to produce and store records of all communications related to the orders/transactions. In more specific terms, investment firms became obliged to: Keep records of all communications related to transactions and intended transactions (for own account or client accounts), including telephone conversations, electronic communications and face-to-face conversations (such may be recorded through written minutes/notes); Notify clients (in advance, and at least once) that communications that result or may result in transactions will be recorded; Provide these records to the respective clients upon request; Keep these records for a period of 5 years, and, where requested by the CA, for a period of up to 7 years. Recording and storing (in an organized way) all communications (voice, video, text, email, social media, face-to-face, etc) held with clients can be quite costly, as it requires new infrastructure, ne...

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, pump and dump is the practice of taking of a long position in a financial instrument and then undertaking further buying activity and/or disseminating misleading positive information about it with a view to increasing its price, by the attraction of other buyers. When the price is at an artificial high level, the long position held is sold out. Similarly, according to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, trash and cash is the practice of taking of a short position in a financial instrument and then undertaking further selling activity and/or disseminating misleading negative information about it with a view to decreasing its price, by the attraction of other sellers. When the price has fallen, the short position held is closed. In my view, the inclusion of the practice of "undertaking further buying (selling) activity (...) with a view to incr...

As for the screening for potential advancing the bid (or depressing the ask)  situations, the trade surveillance system should pop up alerts for limit buy (sell) orders placed above (below) the current best bid (ask) price, taking into consideration that the market participant's behavior is more suspicious as the: Higher is the distance between the price of the buy (sell) limit order and the current best bid (ask); Higher is the frequency at which the market participant places such type of orders; Lower is the security's liquidity. To avoid having excessive false positives, the trade surveillance system's alerts should be calibrated taking into consideration the following diagram: Additionally, as in the other types of market manipulation, the compliance officers should try to understand whether the market participant had an intent to influence the market price. Let's look at the example in which a shareholder of the company XYZ, whose stock is l...

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, advancing the bid is the practice of entering orders to trade which increase the bid for a financial instrument, in order to increase its price. Analogously, we can say that depressing the ask is the practice of entering orders to trade which decrease the ask for a financial instrument, in order to decrease its price. I guess that, similarly to most of the other forms of market manipulation, the key issue is whether there was an intent to defraud the market - i.e., advancing the bid and depressing the ask are forms of market manipulation if they are done without relation to genuine market demand or the worth of the securities, and therefore having solely the goal of altering the market price. Example: From my understanding, the various forms of market manipulation are not entirely mutually exclusive, as it is evident in the case of advancing the bid. Indeed, while advancing the bid...

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, painting the tape is the act of entering orders or making trades that "are shown on a public display facility to give the impression of activity or price movement in a financial instrument". Similarly, the Nasdad describes it as an "illegal practice by traders who manipulate the market by buying and selling a security to create the illusion of high trading activity and to attract other traders who may push up the price." Having these definitions in mind, it seems that painting the tape can be considered to be one of two different practices:  A form of wash trading, or quasi wash trading (as I defined it the post  What is wash trading? ), in which the manipulator artificially inflates the volume by buying and selling the same security at slightly different moments of time (and thereby never participating in both sides of a same trade); A form of momentum ignition, in whi...

On July 2015, the SEC, through an administrative proceeding, issued an order making findings and imposing remedial actions, alongside with an order to cease-and-desist, against Paul Pollack and its fully-owned firm "Montgomery Street Research, LLC" for having pursued wash trading and unregistered brokerage activity. According to the SEC, Paul Pollack (a former stockbroker) engaged, directly or through several different accounts, on 73 separate days between January 2011 and June 2012, in 258 washes trades on a certain penny-stock of an unspecified issuer ("Issuer A") - for which Paul Pollack and his fully-owned firm "Montgomery Street Research, LLC" had raised funds through 2 private placements. The SEC also sated that such placements were made in spite that Paul Pollack and his fully-owned firm "Montgomery Street Research, LLC" were not registered brokers. Specifically, Pollack placed orders to buy (or sell) Issuer A's stocks in one ...

Pure wash trades (see What is wash trading? ) are easy to detect, as long as the trade surveillance system is able to know the identity of the persons who are making the transactions. Indeed, in such case, a simple alert for transactions within the same person (or colluding persons) will work. However, detecting one transaction within the same person (or colluding persons) is definitive not material enough... It even could have happened by mistake... Therefore, in order to mitigate false positives, the trade surveillance system should trigger alerts only when a certain quantity of transactions within the same person (or colluding persons) occurs. In addition, a key factor to understand is whether there was a manipulative intent (just like in other forms of market manipulation). Thus, after detecting a suspicious number of transactions within the same person (or colluding persons), one has to understand who that person is and what reason he/she may have had to allegedly place was...

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, wash trading consists in entering into arrangements for the sale or purchase of a financial instrument where: There is no change in beneficial interests or market risk (A); or Beneficial interest or market risk is transferred between parties who are acting in concert or collusion (B). Self-trading, which is used for example by the US FINRA, is another possible term for wash trading. In addition, the terms wash trades and matched trades are oftenly used interchangeably. However, one may also find wash trades being referred as the situation A and matched trades being referred as the situation B. On its hand, the term matched orders is oftenly used to refer to the orders placed with the intent to generate wash trades (as the manipulator matches one order with the other). Nonetheless, MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015 defines improper matched orders as t...

There can be different ways to detect momentum ignition. Here I exposed one possible approach... The trade surveillance system could be set to: Identify sets of relatively large consecutive, or quasi-consecutive, buy (sell) trades made by the same market participant that had a relevant upward (downward) impact in the market price; Check whether the manipulator sold (bought) a similar or larger quantity some moments later (from a few microseconds up to a few minutes) at a higher price (higher than the one directly marked by the manipulator). Then, the trade surveillance analyst or the system itself (if in a more automated environment) should be able to check whether the manipulator's buy (sell) trades did lead other traders to place new buy (sell) orders in a way significant enough to move the price further.

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, momentum ignition is the act of entering orders or making trades with the purpose of "starting or exacerbating a trend and to encourage other participants to accelerate or extend the trend in order to create an opportunity to close out or open a position at a favorable price." MOMENTUM IGNITION EXAMPLE Momentum ignition is similar to spoofing in the sense that in both practices the manipulator tries to mislead other market participants into believing that there is an increase in buy (sell) interest, to then trade against them at more favorable terms. Typically, both are high-frequency practices, in which an algorithm tries to trigger reactions in other algorithms to then trade against them at more favorable terms. However, these practices differ from one another in the sense that in momentum ignition the manipulator's efforts to mislead other market participant...

In the EU, both MAR and MIFID II empower the national financial authorities to order the venue operators to suspend the trading of securities. Indeed: MAR (Article 23) states that "in order to fulfill their duties under MAR, competent authorities shall have, in accordance with national law," the power to "to suspend trading of the financial instrument concerned". MIFID II (Article 69) states that "competent authorities shall be given all supervisory powers, including investigatory powers and powers to impose remedies, necessary to fulfill their duties under MIFID II and MIFIR", including the power to "require the suspension of trading in a financial instrument". This seems to give very discretionary powers to EU financial authorities in what regards trading suspensions. However, most of such tend to be decided based upon insufficient published information on the securities or its issuers. The FCA (UK), in its Disclosure Guidance a...

Corporate actions are a specific type of events initiated by an issuer that usually: i) have a predetermined arithmetical impact in the price of one or more of its securities; ii) require the approval from the issuer's Board of Directors and Shareholders; and iii) are not directly related to the company's day-to-day business decisions. Corporate actions can be categorized in two types: Distributions: Dividends; Rights issues; Bonus issue; Bond interest payment; Bond redemption. Reorganizations: Mergers; Absorptions; Acquisitions; Spin-offs; Stocks splits; Reverse stock splits; Issuance of new shares; Cancellation of shares; Delistings. Example Paragon ID (a french provider of identification solutions with shares listed in Euronext Paris) implemented a 35:1 reverse stock split, as approved by its shareholders at an Extraordinary General Meeting on 27/Feb/2018, to become effective on 12/Apr/2018, with the following terms: Before the reve...

There is nothing wrong in placing small orders in a dark pool. The problem is when the underlying intent is not really to make such transaction but to obtain information about hidden orders that may be resting in the said venue. In practice, for a small order to be considered a ping order, there has to be evidence that the market participant benefited (or tried to benefit) from the obtained information, by trading (or trying to trade) subsequently at more favorable conditions. For this purpose, an alert can be set to notify whether the following pattern occurs: Placement, by market participant A, of a small sell (buy) order in the dark pool that is immediately executed; Upward (downward) price movement in the respective light market, driven by trading actions (such as spoofing) performed by market participant A; Placement, by market participant A, of a large sell (buy) order in the dark pool that is immediately executed at a higher (lower) price than the one recorded in the ...

The MIFID2/MIFIR regulatory package increased substantially the requirements related to transaction reporting to the Competent Authorities. MIFID2/MIFIR increased considerably the scope of information (more financial instruments and more data fields) reported to the CAs, amplifying considerably the supervisory powers and, hopefully, leading to better detection and prevention of market abuse. In terms of data fields, one of the substantial changes is that IFs have now to identify both the account owner and the decision maker of each transaction, including the trader or algorithm responsible for the decision. This means that, even in a transactions that had a few layers of brokers (p.e., client > retail organization > larger broker > member of the exchange > exchange), it became much easier for the CAs to identify: the ultimate beneficial owner and the decision-maker of each transaction. The changes are also significant from the cost perspective, specially ...

Placing ping orders, or pinging, consists in placing small orders in a dark pool  to obtain knowledge whether there are large orders placed on the other side of the book. With such action, the pinger can then trade at an advantageous position, as she holds more information about the order book than the other market participants. Pinging can be done in combination with other types of manipulation, such as spoofing . The EU MAR, via its Commission Delegated Regulation (EU) 2016/522 of 17 December 2015, defines placing ping orders as "entering small orders to trade in order to ascertain the level of hidden orders and particularly to assess what is resting on a dark platform", and considers such practice to be a form of market manipulation. Example:

Iceberg orders are semi-dark orders placed within light order books. Semi-dark in the sense that such orders have an apparent (disclosed, visible, peak) quantity and a hidden quantity – with the first being usually smaller than the latter. In many markets, such as in Euronext, when the apparent quantity is fully fulfilled, the order goes to the end of the queue (within the same price limit) with new apparent and hidden quantities. Iceberg orders are used by investors to execute bloc transactions, as they mitigate market impact. For such reasons, investors are usually only allowed to place iceberg orders when the quantity to trade is significant. For example, at Euronext, iceberg orders must be larger than 10.000 Eur – the order is automatically converted into a transparent order if the its value falls under such threshold.

Michael Coscia, the manager and sole owner of a small New Jersey-based trading firm called Panther Energy Trading LLC (founded in 2007), was the first person to be criminally prosecuted under the Dodd-Frank Act’s spoofing provision, being sentenced to 3 years in prison, in relation to trading strategies he pursued between August 2011 and October 2011. Before the indictment On October 2011, Michael Coscia was notified by the US Commodity Futures Trading Commission (CFTC) and by the UK Financial Conduct Authority (FCA) for allegedly violating exchange rules and the Dodd-Frank Act’s spoofing provision. Michael Coscia states that, after receiving such notice, he stopped using the suspicious trading strategy. On July 2013, he settled with the above mentioned authorities, having disgorged all profits (amounting to 1,7 million USD), paid fines (amounting to 2,8 million USD) and been suspended from trading during the period of 1 year. The indictment In spite of the said set...

With trading in today's world being characterized by order books that constantly change at the millisecond, trade surveillance analysts (from asset managers, brokers, exchanges and authorities) do not have an easy task in identifying spoofing situations. Many spoofing/layering schemes are not seamless (i.e., do not follow perfect textbook spoofing/layering patterns), as: i) the manipulator, while spoofing, can simultaneously place/modify/cancel other orders to confuse the trade surveillance system/analysts; ii) in a liquid market, other traders simultaneously place/modify/cancel orders, making it harder to isolate/identify the manipulative pattern. For example, if we are looking to detect typical patterns of layering (where there are multiple price steps from the manipulator), an alert can be set to be triggered whenever: A market participant (A) places a buy (sell) order that is immediately executed against an order of another market participant (B) at the best ask (bid...