Price manipulation and online trading: AMF Enforcement Committee sanctions one person and Bourse Direct
In a decision handed down on 1 October 2014, the AMF Enforcement Committee imposed financial penalties of €75,000 on Mr A and €250,000 on the company Bourse Direct.
Mr A is accused of breaching price manipulation rules and disseminating false information in online investment forums.
Action was taken against Bourse Direct for not establishing a compliance function with the resources and expertise necessary to fulfil its duties and, more specifically, for failing to adopt the appropriate organisational structure and procedures to identify suspicious transactions involving price manipulation.
The decision establishes that Mr A, who has invested in the stock market almost daily since the early 2000s, repeatedly used the same method to trade on the small-cap market, buying and reselling stocks over the course of a single day without holding a position for more than one trading day.
The Committee described the method as follows: Having identified a slight short-term bull trend in volatile stocks (phase 0), Mr A then bought them (phase 1) by entering aggressive buy orders that were executed immediately. In addition to the purchase of the stocks, this resulted in an upward shift in the best bid/offer spread, thereby perpetuating the initial bull trend. Subsequently, in phase 2, he entered large passive market-to-limit buy orders. In phase 3, he entered orders to sell the stocks purchased in phase 1, benefiting from the incremental rise in the share price sustained during phases 1 and 2. Mr A's sell orders were executed using the liquidity provided when other investors bought the stocks, enabling him to cancel the passive buy orders placed during phase 2.
Noting that these passive buy orders could involve amounts matching or exceeding the respondent’s assets, including his home, the Committee considered that these orders were not placed with the intention of being executed since they were routinely cancelled after the phase 3 sales. Moreover, based on their number and volume, the orders were likely to give false or misleading indications about demand for the financial instruments in question. This procedure could be likened to the technique of layering.
The Committee therefore decided that, in 202 sequences concerning 30 different stocks, Mr A used the method described above to manipulate prices within the meaning of Article 631-1, 1° of the AMF General Regulation.
In contrast, it considered that, while Mr A did disseminate false information within the meaning of Article 632-1 of the AMF General Regulation by giving opinions on certain stocks in online forums without informing potential readers that he held positions in them and was therefore in a conflict of interest, this was not sufficient in and of itself to be characterised as a second price manipulation violation, on the basis of Article 631-1, 2° of the Regulation.
The Committee also took Mr A’s precarious financial situation into consideration when imposing a financial penalty of €75,000.
With regard to Bourse Direct, the Committee noted both the lack of resources allocated to making a reliable, effective analysis of price manipulation alerts and the failure to formalise and track these analyses. Although the company had configured numerous alerts, it was unable to process them effectively, notably by cross-checking them against each other. Had it done so, the company would have been able to detect, for example, order cancellations followed by position reversals. The Committee also stressed that although the company’s head of internal control had requested more staff in 2009 and increased technical analytical capabilities in 2010, no action was taken on either count until nearly two and a half years later.
In consequence, the Committee considered that Bourse Direct had not established a compliance function with the resources and expertise necessary to fulfil its duties and, more specifically, that it had not implemented the appropriate organisational structure and procedures to identify suspicious transactions involving price manipulation.
Taking into consideration that, despite the significant increase in Bourse Direct’s business in 2011, together with a sharp rise in profit, the human resources of the permanent control function “were […] not increased until the end of 2011 and its IT capabilities were not strengthened until the end of 2012,” the Committee decided to exceed the demands of the AMF Board and impose a financial penalty of €250,000 on the respondent. That decision is rare enough to be highlighted.
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