FSA Concludes HBOS Rumours Investigation

by Jason Gorringe Tax, News.com, London

01 August 2008

The FSA on Friday issued a statement outlining the background to its investigation into suspicious trading in HBOS shares earlier this year and the conclusions reached following the probe.

On 19th March 2008, the Financial Services Authority confirmed that it would be conducting an investigation into trading in HBOS, following a sharp fall in its share price.

On Tuesday, 18th March 2008 the HBOS share price closed at 480p. Prior to market opening and throughout the morning of Wednesday 19 March 2008, various rumours circulated in the market that a British bank faced funding difficulties.

Several of the rumours identified HBOS by name: they contended that the Governor of the Bank of England had cancelled his Easter travel plans in order to resolve a liquidity problem at HBOS; and/or that the Bank of England was “bailing out” HBOS.

Following the opening of the market at 8:00am, the HBOS share price initially rose two pence despite the rumours.

However, the share price started to fall from 8:30am and this fall accelerated sharply from 8:40am until an automated trading halt was hit at 8:43am, with the share price at 440p.

When trading recommenced at 8:49am, the share price fell dramatically, hitting 398p at 8:52am - a fall of over 17% from the previous day's close.

After this precipitous fall, the HBOS share price recovered quickly to 439p by 8:55am and ended the day at 446p – a fall of just over 7% from the previous day’s closing price.

On the afternoon of 19 March 2008, the regulator revealed, FSA staff from Enforcement, Markets, Supervision and Intelligence began to analyse trading in HBOS and to contact market participants and news organisations, in order to determine whether a person or persons might have spread misleading, false or deceptive information regarding HBOS to profit from a reduction in its share price.

During the course of the investigation, FSA staff also interviewed a number of market participants at investment banks, broker dealers and hedge funds – including traders, senior management and compliance staff.

The FSA's Market Monitoring team reconstructed segments of the order book, scrutinised trading records relating to HBOS shares and derivative instruments, analysed market transaction data for all HBOS instruments including OTC derivative instruments, through their centralised transaction monitoring database, and reviewed e-mails and messages – including taking steps to verify any specific e-mails and messages highlighted by market commentators.

The FSA also looked at message boards, and reconstructed global press coverage of HBOS during the relevant period.

This information allowed the investigation to view the development of the rumours over time and assess their impact on market sentiment, the market’s response to the rumours, and the factors contributing to the movement in the HBOS share price on the day.

The investigation has now concluded.

The FSA observed that: "At the time the HBOS rumours circulated, there were very uncertain market conditions in relation to the UK banking sector."

"This, coupled with the news regarding Bear Stearns the previous weekend, meant that traders and other market participants were very actively monitoring their positions in UK banking stocks (and were prepared to give credence to, and act on, negative market information)."

"There is no doubt that false and damaging rumours were circulating about HBOS on 19 March 2008 and these would have had some impact on HBOS’ share price."

"It is difficult, however, to say how much impact, as the share price was also affected by the interaction of a number of other complex factors on the day, including:

• A lack of liquidity in the order book with parties unwilling to enter buy or sell orders, particularly after the automated trading halt; and
• The effect of algorithmic trading strategies, which amplified the impact of the initial downward trend in the HBOS share price."

"Despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price."

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