How do you know what a regulator intends to analyze when it comes to market abuse? The answer is simple: look at what they’re telling you. It might at times seem subtle, but regulators do advertise what they plan to analyze. The trick is to take note when they do.
The Financial Conduct Authority (FCA) in the UK has made just such a declaration with the publication of its Potentially Anomalous Trading Ratio. This is the latest of its Market Cleanliness Statistics, a series of metrics it uses to report on potentially abusive behavior on the UK equity markets. The FCA makes a concerted effort to keep the report up-to-date to protect the market and demonstrate to firms and the public how they monitor market integrity.
What does the latest metric tell us about the FCA’s focus? The Potentially Anomalous Trading Ratio (PATR) builds on the established Market Cleanliness statistic and the Abnormal Trading Volume Ratio and is used to determine if an account is demonstrating anomalous behavior. To arrive at the metric, the FCA analyzes several characteristics of an account’s trading activity:
- The account does not typically trade in the instrument
- The account traded significantly more in the direction of the announcement
- The account made a significant profit from trading positions established in the period immediately prior to the announcement.
Importantly, the FCA notes that even where activity is identified as anomalous according the PATR standard, it does not mean the trading was necessarily unlawful. The FCA division responsible for investigating market abuse will always work to determine the exact nature of the activity and the reasons for trading before launching an investigation. PATR should therefore be viewed as an illustration by the FCA of the sort of activity that may warrant further investigation.
The FCA goes further and provide a range of values that lie behind the metric. Firms can look at these as a notice list of things the FCA is keen to keep a close eye on. The list includes:
- Time periods: Profitability is analyzed over two time periods: pre- and post-announcement.
- Potentially sensitive announcements: Potentially price-sensitive news announcements (PPSNAs) are identified, and trading behavior analyzed around these announcements to spot anomalies from historic norms.
- Percentage price change relative to the sensitive news announcement: A factor which is used to account for the profitability of the activity.
- Trading direction: Traded volumes must exceed a specified multiple in the profitable direction of the trading.
- Benchmark comparison: A longer period prior to the pre- and post-observation period during which the “normal” trading volume for the instrument can be identified.
Scott Burke, Global Regulatory Product Manager, comments: “Surveillance programs within Compliance and Supervisory functions have the responsibility to implement the proper systems and controls to apply analytics to their own trading operations to identify anomalous trading, above and beyond specific transaction rule violations.
“To ensure this is done to a sufficiently rigorous standard, firms should study the metrics issued by the FCA and the associated reports. This information provides visibility into how the regulator analyzes trading and can thereby enable firms to manage their compliance approach to the appropriate standard.”
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