The explosion of retail investment in the wake of Covid-19 has been accompanied by an apparent surge in certain types of market manipulation, observed regulators from across the Asia Pacific region speaking at last month’s ASIFMA Compliance Week.
In the case of India, the growth in retail participation has been staggering, with the number of retail investors jumping from 30 million to 50 million, revealed Ananta Barua, Whole Time Member of the Securities and Exchange Board of India (SEBI).
This along with the increasing role of social media and ‘finfluencers’ in driving markets has opened a Pandora’s box of market manipulation issues. “Social media and finfluencers have been fantastic for sharing knowledge and ideas and a great way for new investors to learn very quickly about markets. But they can also fuel misinformation,” noted Calissa Aldridge, Senior Executive Leader – Market Supervision at Australian Securities and Investments Commission (ASIC).
“We’re seeing many examples of unlicensed influencers who are getting commissions in return for recommending products to clients. There is a lot of fraud as well. What really differentiates it from other such instances in the past is the speed and size of the audience. Tweets are reaching thousands or millions of people.”
Other emerging concerns revolve around copy trading, fractional share trading, incentive structures driving zero- or low-commission brokerages and gamified applications. “We’re doing a lot of thinking around whether the regulatory perimeter needs to change,” added Aldridge.
Given that regulators will have to expand their purview in order to keep up with the widening reach and scope of market manipulation, they will need to rely on technology to make their tasks feasible. “AI and behavioral analytics are increasingly defining best practices in market surveillance,” said Grace Chong, Of Counsel, Regulatory & Digital Business at Simmons & Simmons in Singapore.
Tech-forward Singapore is unsurprisingly leading the charge, with the Monetary Authority of Singapore (MAS) having developed an AI-driven securities enforcement tool called Project Apollo in 2018 to help the regulator better decide how it should prioritize and pursue cases of market manipulation. The system models rogue trading behavior using traits identified by human experts, offering analysis and prediction during early stages of investigations.
Meanwhile, ASIC installed a significant system upgrade in June, “but we also have a multi-year project to build out our capability of monitoring wholesale fixed, currency and commodity markets,” said Aldridge. “As part of that, we are also consulting on changing the OTC trade reporting data that feeds into it.”
India is moving more slowly given the size and complexity of its market, served by eight active stock exchanges and two depositories. In addition, India stands out from other markets in the region by only having a single order book and requiring intermediaries to conduct all trades, including block deals, on exchange, explained Barua.
This leads to one of the three types of common manipulation of the Indian market, known as synchronized trading. “Since we don’t permit cross deals, there may be entities who, in order to ensure the trade does not go to others, coordinate the exact time, quantity, price and location of their buy and sell orders.”
The second type of manipulation involves the closing price of securities. “The last half hour of trading is the price which constitutes the price for the next day opening and also forms the basis for derivates trading. Therefore, some traders try to manipulate prices in the last half hour,” added Barua.
And a third type of manipulation is order book manipulation, termed spoofing elsewhere. “Some traders put in an order away from the real market price, then shortly after placing the order, they delete it.”
As a precursor to an ambitious project to use data analytics to identify and predict market manipulation such as insider trading and front running, SEBI has set up a data lake with an analytics platform. It has also shortlisted several companies to build analytic models with artificial intelligence and machine learning. The analytics development would include establishing linkages between various entities in the market and automated extraction of details from documents filed with SEBI.
“While our current system can identify order book manipulation by a single entity, there is a need to expand the scope to identify such trading patterns among groups of connected entities,” said Barua.
While the region’s regulators are hoping to leverage technology to move towards a more proactive approach to identifying and curbing market abuse, for now, the task remains largely responsive, conceded Michael Duignan, Head of Market Misconduct Team at Hong Kong’s Securities & Futures Commission (SFC). “It’s very hard to predict market abuse before it happens. It tends to be event driven, so a lot of it is about detection and you can only detect what is happening.”
Moreover, while it may seem like abuses such as ramp and dump cases have become more prevalent of late, it could merely be a case of heightened awareness. “There is a possibility of a red car effect,” explained Duignan. “If you buy a red car, you suddenly notice how many red cars are on the roads. Although we’ve had an explosion in terms of ramp and dump cases recently, were they always there and we just didn’t notice before, or are they actually new and much more active? We’re still working through that and getting a sense of where we stand.”
The SFC recently released a circular to intermediaries reminding them of their reporting obligations and the signs to be on the lookout for, particularly with respect to ramp and dump schemes.
When it comes to ramp and dump schemes, “a lot of the time the people who bought the shares are not the ones who sold the shares” explained Michael Duignan, the SFC’s Head of Market Misconduct Team. “So, one sign is if you had large amounts of shares being transferred through bought and sold notes, where the shares are being bought, at times, for literally nothing, with no payment whatsoever.
“Another sign is if you have trading that seems well out of line with a person’s initial stated income and asset base. If you say at the start you only have a million dollars, then you’re trading tens of millions of dollars worth of stock, then clearly there is something wrong with that, so it requires further investigation and assessment. We’ve had examples where someone like a driver has a share portfolio in excess of HK$1 billion (US$129 million). He’s either doing really well on tips, or there’s something going on there.”
