FSA Unveils Plans To Measure Market Abuse

by Robin Pilgrim, LawAndTax-News.com, London

21 March 2006

The UK's Financial Services Authority (FSA) last week published a method of measuring the cleanliness of UK financial markets.

The methodology measures market cleanliness by looking at the extent to which share prices move ahead of the regulatory announcements that companies are required to make to the market, and should enable the FSA to measure, over time, its success in tackling market abuse, one of its key aims.

This is part of the FSA's drive to establish key indicators that will help it understand better how successful it is at achieving the intended benefits of regulation.

Hector Sants, FSA Managing Director, explained that:

"Our future success in reducing market abuse should be measured not by gut feel or fines levied, but by using a robust, analytical tool that will stand the test of time."

"The methodology we have developed gives us such a tool and is an important step forward in establishing the starting point against which the FSA's future work in tackling market abuse should be judged."

Researchers for the FSA analysed two kinds of market announcements: those relating to take-over bids in 2000 and 2004 and announcements about the trading performance of FTSE 350 listed companies between 1998 and 2003 - around 1,500 announcements in total.

They then examined announcements that led to a large or abnormal share price movement since these are the announcements most likely to contain information of use to an insider trader, and assessed the proportion of such announcements that, in fact, were preceded by an apparent "informed price movement" that could mean that some trading on unpublished information occurred.

The analysis of FTSE350 announcements covered a period before the Financial Services and Markets Act (FSMA) came into effect, and a later period, when FSMA was in force but the FSA had yet to complete any enforcement action against market abuse.

The analysis indicated that there was no change in market cleanliness in relation to announcements by FTSE 350 listed companies. The analysis of announcements relating to takeovers included 2004, when five misuse of information cases were completed, and showed that there was a small but statistically significant increase in informed price movements suggesting a deterioration in market cleanliness.

Mr Sants concluded that:

"The analysis shows that there was no improvement in market cleanliness in the period after the introduction of the FSA's new powers, and before any high-profile enforcement cases were concluded. This suggests that visible enforcement action may be the key tool in our work to reduce market abuse."

The FSA revealed that it intends to repeat the analysis later this year for later periods.

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