CFD Spoofers Fined over £7 Million by UK Court

A UK court today ruled that the Financial Conduct Authority (FCA) is entitled to permanent injunctions and penalties totalling £7,570,000 against three Hungarian traders and a Swiss investment firm for unfair trading practices.

Da Vinci Invest Ltd, Mineworld Ltd, Mr. Szabolcs Banya, Mr. Gyorgy Szabolcs Brad and Mr. Tamas Pornye were found to have committed market abuse in relation to 186 listed shares using a manipulative trading strategy known as "spoofing" or “layering”.

The technique consisted of entering and trading of orders in relation to shares traded on the London Stock Exchange in such a way as to create a false or misleading impression as to the supply and demand for those shares, enabling them to trade those shares at an artificial price.

How It Worked

The traders typically used a mixture of large and small orders entered on one side of the LSE's order book to create a false impression of supply or demand in a particular stock. These orders were not intended to be traded. The large orders were carefully placed at prices close enough to the best bid or offer prevailing on the LSE at the time to give a false impression of supply and demand, but far away enough to minimize the risk that they would be traded.

The small share orders (typically around 100 shares) were used to improve the best bid or offer price. As the price improved, further large orders were strategically placed at prices close to the new best bid or offer in order to support the improved price. In this way the traders systematically sought to manipulate the share price up and down.

These orders had the effect of moving the share price as the market adjusted to the apparent shift in the balance of supply and demand. Once the price had been moved to an advantageous level, they initiated a trade on the other side of the order book in order to profit from the price movement that they had created. These trades took place either on the LSE or on a competing venue in order to take advantage of available Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term.

The large “layered” orders, which were never intended to trade and which were used to stimulate the price movement of the relevant shares, were then cancelled and the process would start over again, typically aimed at moving the share price in the opposite direction. In this way the actions consistently resulted in buying shares at lower prices and selling shares at higher prices than would have been the case had the strategy not been employed.

Abusing CFDs

The traders accessed the relevant trading platforms via Direct Market Access (DMA) brokers. DMA allows clients direct access to exchanges and other trading platforms. They did not trade directly in shares but used a derivative instrument called a Contract for Difference (CFD), the price of which precisely matches the price of the underlying share.

The nature of the CFD/DMA accounts was such that the traders knew that CFD orders placed with the DMA providers would immediately and automatically result in the placement of equivalent orders in the underlying shares on the relevant Trading Platform Trading Platform In the FX space, a currency trading platform is a software provided by brokers to their respective client base, garnering access as traders in the broader market. Most commonly, this reflects an online interface or mobile app, complete with tools for order processing.Every broker needs one or more trading platforms to accommodate the needs of different clients. Being the backbone of the company’s offering, a trading platform provides clients with quotes, a selection of instruments to trade, real In the FX space, a currency trading platform is a software provided by brokers to their respective client base, garnering access as traders in the broader market. Most commonly, this reflects an online interface or mobile app, complete with tools for order processing.Every broker needs one or more trading platforms to accommodate the needs of different clients. Being the backbone of the company’s offering, a trading platform provides clients with quotes, a selection of instruments to trade, real Read this Term, so as to affect the underlying share price.