It was 1:00 am on February 21, 1814, when the door of the Ship Inn in Dover was suddenly yanked open and a Bourbon officer, seemingly near exhaustion, rushed in. He had just crossed the Channel from France, he gasped, and had come bearing the greatest news in the last 20 years. Then he asked for paper and ink and penned a letter to the admiralty in London conveying “dispatches of the happiest nature,” namely that “Bonaparte was overtaken by a party of Cossacks, who immediately slayed him.”
News of Napoleon’s demise circulated. People heaved a sigh of relief and the markets reacted euphorically. But when the hoax came to light – Napoleon would die seven years later – it turned out that the purported officer and his sidekicks had purchased British government bonds beforehand, earning a profit of 500,000 British pounds (GBP 50 million in today’s currency) on subsequently selling them. The conspirators were prosecuted, and their crime established a legal precedent and went down in the annals of history as the Great Stock Exchange Fraud of 1814.
Since When Has Market Abuse Existed?
The alleged death of Napoleon is a prominent example of market abuse, but it’s neither the first nor the last one. Back in 600 BC, the philosopher Thales of Miletus cornered the market for olive presses, gaining a monopoly over it. And in 2022, the US Securities and Exchange Commission (SEC) filed 43 criminal complaints in court for the offense of insider trading alone (15 more than in 2021).
What Is Market Abuse?
The SEC applies a very broad definition to do justice to the countless ways that exist to unfairly manipulate the market. “Market manipulation,” the SEC writes, “is when someone artificially affects the supply or demand for a security (for example, causing stock prices to rise or to fall dramatically).”
What Regulation Covers Market Abuse at EU Level and in Spain?
The regulation currently in force at EU level is the Market Abuse Regulation (MAR) of April 2014, which consists of the EU Regulation 596/2014, which is directly applied in all Member States, and of the Sanctions Directive 57/2014, which as all directives, is transposed into national law.
MAR represents a comprehensive framework established by the European Union to prevent inter alia market manipulation, insider dealing, and unlawful disclosure of inside information. As it is a regulation it is directly applied, it doesn’t have to be transposed into the national laws of Member States. Its main goal is to maintain the integrity of financial markets and bolster investor confidence by enforcing strict compliance standards and severe penalties for violations.
The second leg of MAR, the Sanctions Directive 57/2014, was transposed into national law on 20 February 2019, through the Organic Law 1/2019, of 20 February, which amends articles 284 and 285 of the Spanish Criminal Code.
6 Types of Market Abuse
Despite this very generalized wording and although fraudsters are very inventive, an exhaustive “taxonomy of cheating” of sorts actually exists today. The Financial Markets Standards Board (FMSB), a nonprofit organization that develops new market standards, examined 400 cases of market abuse in 28 countries spanning over 200 years in a large-scale study and grouped almost two dozen different market manipulation techniques into six misconduct categories.
“History may not repeat itself, but it rhymes” is the motto of the study. Decide for yourself in which category you would classify the Great Stock Exchange Fraud of 1814.
The spectrum of behaviors that illicitly influence the price of securities or derivatives includes the following:
Circular trading typically involves entering into transactions that cancel each other out and therefore do not transfer any market risk or value. The spectrum of transactions with no legitimate commercial rationale includes:
Insider knowledge becomes a detriment to third parties in cases of:
Actions or attempts undertaken to influence reference prices that are used in the market to value other positions are illegal. The various ways of illicitly influencing reference prices include:
Customers or their data can be misused by:
A misleading impression can be created in the minds of clients or market participants by:
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