The UK Financial Conduct Authority in its latest market abuse peer review or Market Watch said it found “gaps in surveillance” among contracts for difference (CFDs) providers. According to the financial watchdog, its study of nine CFDs providers in the country show that they are not paying enough attention to market abuse risks in non-equity assets classes.

This is despite the fact that the regulator’s findings 'were largely positive' as all the reviewed CFDs providers had surveillance in place to detect insider dealing. The watchdog considered most of these surveillance mechanisms to be 'effective'.

“All these firms offer CFDs and/or spread bets in non-equity asset classes, but there was little consideration of these in their market abuse risk assessments and limited detail about market manipulation in all asset classes,” FCA said.

Poor Monitoring of Market Manipulation

Additionally, the regulator found that the firms are not doing enough to capture market manipulation practice called 'narrowing the spread'. This is a practice where traders seek to influence the prices of spread bets or CFDs by placing a buy or sell order of a security with a direct market access (DMA) brokerage in order to 'narrow' the spread of the security and influence the execution price of a CFD or spread bet based on them.

The FCA noted that while some firms were not aware of this type of practice, most knew of it as they submitted Suspicious Transaction and Order Reports (STORs). However, none of the examined CFD providers listed this practice in their risk assessments or had compliance -based surveillance in place to detect them.

“CFDs and spread bets are particularly vulnerable to being used for insider dealing due to the speculative and leveraged nature of the products. They are a major source of Suspicious Transaction and Order Reports (‘STORs’),” the FCA explained.

“We are also aware of a potential increase in a type of manipulative behavior where spread bets and CFDs are being used to realize profits following manipulative practices in the underlying market via other firms,” the regulator added.

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