The Conduct Chronicles – “The real-world impact of Market Manipulation”
Emma Parry discusses how regulators are increasing enforcement and urging firms to improve oversight, as seen in cases such as the 'Whatsapp' fines and JP Morgan's market manipulation, underscoring the broader impact of market abuse on consumers.
Written by a human
If you’ve been keeping a close on eye on the regulators, two things might have caught your attention. The first being greater transparency around their priorities, and the second being the sudden influx of news headlines revealing the extent of enforcement actions on the back of their thematic reviews.
Text and the City
One of the most notorious and recent examples of large-scale enforcement actions is the now infamous series of ‘WhatsApp’ fines that started to emerge in late 2022. The SEC had advised that its 2021 examination priorities would include record keeping and record retention hence firms should have been prepared. However, given what was about to unfold, it would appear that wasn’t the case.
With a steady stream of fines imposed on virtually every global financial services firm, the seemingly relentless issuance of enforcement actions sent shockwaves through the industry. In amongst the media frenzy, firms quickly mobilized teams to identify and fix potential eComms gaps (or implementing specific channel bans) whilst industry pundits speculated about which firm would be next.
And whilst the focus of the media headlines was ‘WhatsApp’ the real issue at hand wasn’t actually the communications method per se, but the need for firms to capture and retain complete and accurate records. And, of course, the ultimate rationale for the records is to enable investigations into potential market abuse, and more broadly, to help preserve market integrity.
Of course, it’s not just eComms surveillance, and record keeping, upon which regulators are focused. In Australia, ASIC had previously stated that manipulation in energy and commodities derivatives markets was an enforcement priority for 2023. Firms should not have been surprised to learn therefore that ASIC, true to its word, had not only been investigating potential market manipulation, but was already pursuing legal cases and issuing fines.
JPMorgan: ‘Marking the Close’
In May 2024, Australia’s ASIC took action against JPMorgan for permitting suspicious client orders to be placed on the ASX 24 futures market. Following an investigation, the Markets Disciplinary Panel (MDP) fined J.P. Morgan Securities Australia Limited (JPMSAL) $775,000.
The MDP found that JPMSAL ‘should have suspected 36 orders placed by a client between 11 January 2022 and 3 March 2022 were submitted with the intention of creating a false or misleading appearance with respect to the market for, or the price of, the Eastern Australia Wheat futures January 2023 (WMF3) contracts.’
Providing further detail, MDP opined that the client’s orders exhibited characteristics of an intention to manipulate the market by ‘marking the close’ – that is, placing orders or trading close to the end of a trading session to influence the daily settlement price of a derivative contract. This caused the contract price to divert from the forces of genuine supply and demand.
It’s worth highlighting that, in this case, it was the regulator that spotted the potential market abuse, rather than JPMorgan, with ASIC on the case immediately raising its concerns. Hence, in its statement, MDP highlighted that ‘JPMSAL should have detected the conduct, and should have acted more expeditiously when alerted to it by ASIC.’ Further emphasizing this point, ASIC remarked that ‘market participants cannot solely rely on automated trade monitoring systems to detect potential misconduct and must take immediate action once alerted to misconduct by ASIC’.
The case provides a fascinating insight into the working relationships between firms, regulators and clients and the need for those relationships to be, not just effective, but also responsive and dynamic in situations where potential market abuse has been detected.
Summing up the case, ASIC chose to draw a very clear line between potential market manipulation and the lives of everyday consumers, remarking that:
‘There are real world consequences for this sort of behavior which is why tackling manipulation in energy and commodities derivatives markets has been an ASIC priority… Farmers use these contracts to manage wheat price fluctuations which can affect what Australians pay at the checkout.’ – ASIC Deputy Chair, Sarah Court
Whist the complexities of trading, and the sophisticated strategies often employed in market manipulation cases, may seem far removed from the lives of everyday consumers, this case serves as a very real reminder of the interconnectedness and why preserving market integrity is critical to us all. Market manipulation can erode trust and confidence in the market, whilst increasing costs for farmers, food manufacturers, and ultimately, the prices consumers pay at the supermarket.
JPMSAL complied with the Infringement Notice and paid the fine, and in related matters, ASIC announced in July 2024, that it had launched civil penalty proceedings in the Federal Court against COFCO International Australia Pty Ltd and COFCO Resources SA who are the clients alleged to have placed the orders with JPMorgan.
The Truth Behind the Headlines
Control deficiencies, such as those identified in the ‘WhatsApp’ enforcement actions or the JPMorgan ‘marking the close’ legal proceedings, result in firms being less able to investigate potential market abuse or manipulation. Investigations require complete and accurate data alongside the capabilities and resources to correlate and analyze often disparate and siloed data which, depending on the scenario, may comprise a combination of eComms, trade, market and client data. Fundamentally, firms need to be able to reconstruct a series of events relating to a transaction to ascertain whether market abuse may have taken place.
On a related point of course, the last thing a firm should want is to have a regulator knock on their door alerting them to control deficiencies be it, eComms coverage gaps, trade surveillance deficiencies, or potential market manipulation by one of their clients.
In a world of limited resources, the fact that regulators provide insights into their enforcement priorities should enable firms to schedule the relevant control reviews and risk assessments thereby ensuring compliance with their obligations.
And finally, whilst we may be tempted to focus solely on the control deficiencies highlighted in these enforcement cases and the sensational headlines, we mustn’t lose sight of the bigger picture. Market manipulation has real world consequences.
