by Adil Siddiqui, Independent Financial Services professional.
The FSA has been closely monitoring Financial Markets and the transparent functioning post Lehman. This the first time an individual has been fined such a harsh amount in the derivatives trading in particular spread betting. The FSA has been closely monitoring the derivatives CFD and Spread Betting sector in the UK, this is on the back of a spike in new accounts being opened in light if the intense Volatility in the market. Notably FSA regulated Spread Betting /CFD firms were told in a 'thematic communication' back in April 2010 that they shouldn't say we offer the 'tightest' spreads and should focus more on the risk warnings.
Alexander however immediately hit back at the FSA saying: "My argument is those 30,000 shares don't manipulate the market. They have consequences but those consequences are aimed at City Index, not at hurting the integrity of the market. The FSA is there to protect the market, not to protect City Index."
Details of the fine:
The Financial Services Authority (FSA) has obtained a court order preventing Barnett Michael Alexander, a self employed trader, from committing market abuse and ordering him to pay a £700,000 fine and £322,818 in restitution to firms which experienced a loss as a result of his actions.
The FSA has also banned Alexander from performing any function in relation to a regulated activity, and he has transferred to the firms a further £306,312 held in trading accounts controlled by him.
In the period 1 January 2009 to 25 May 2010 Alexander, an experienced trader and former private client stockbroker, was operating as a self-employed trader dealing in shares and retail derivative products such as contracts for differences (CFDs) and spread bets from his home address.
Alexander manipulated the prices of shares on the London Stock Exchange by entering multiple small orders to buy and sell shares. The purpose of these orders was to manipulate the price of CFDs and spread bets, which track the price of shares. Alexander generated £629,130 by trading CFDs and spread bets at the prices he created through his share price manipulation, and frequently used CFD and spread betting accounts in the names of third parties to disguise his behaviour. This manipulation of the prices of shares and derivatives at the expense of the firms amounts to market abuse.
In May 2010 the FSA obtained a temporary injunction from the High Court preventing Alexander from committing market abuse, and froze £1 million of his assets. This was the first FSA injunction preventing market abuse. The High Court has now made that order permanent and has ordered Alexander to pay the fine and restitution. The permanent injunction is the second the FSA has obtained against an individual for market abuse.
Tracey McDermott, the FSA’s acting director of enforcement and financial crime, said:
“The FSA views market manipulation extremely seriously. Alexander’s behaviour was deliberate and repeated over a significant period of time. He sought to conceal his trading and made substantial profits at the expense of the firms which allowed him to trade with them.
“The court action shows the FSA’s determination to use all our powers to prevent market abuse and to pursue those who commit it.”
The FSA has taken into account the fact that Alexander was a self employed trader, not working in the financial services industry, at the time of the misconduct and that he has fully admitted his market abuse. For these reasons the ban has been limited to a minimum term of five years.
Alexander agreed to settle at an early stage of the FSA's investigation and consented to the court order. He therefore qualifies for a 30% discount on his financial penalty (but not the requirement to make restitution). Were it not for this discount, the FSA would have asked the court to impose a financial penalty of £1,000,000 on Alexander.
Background
- The Final Notice for Barnett Michael Alexander can be found on this website.
- A detailed example of Alexander’s trading strategy is given in section four of the final notice.
- The FSA became aware of Alexander’s activity as a result of the submission of a Suspicious Transaction Report by an authorised firm. The firm identified examples of Alexander’s trading strategy after carrying out an internal investigation, and reported the activity to the FSA.
- Alexander asked third parties to open CFD and spread betting accounts in their own names. The third parties would then provide him with the login details for these accounts, which he then used as if he were the account holder.
- CFDs and spread bets are both types of financial derivative instruments, through which investors can gain exposure to share price movements without owning the shares. Many retail brokers provide CFD and spread betting services by way of automated electronic trading systems, which often offer CFDs and spread bets at prices determined by direct and immediate reference to the best bid and offer prices in the underlying shares on the London Stock Exchange.
- Alexander placed orders for shares using a Direct Market Access (DMA) provider. DMA is a service offered by some stockbrokers, who are exchange member firms, that enables investors to place buy and sell orders directly on the order book. The FSA encourages DMA providers to be aware of the risk that such access may be abused and to ensure they have adequate systems and controls in place to monitor for abusive trading strategies and to report any suspicious activity to the FSA in a timely manner.
- The injunction the FSA was granted in May 2010 restrained Alexander from continuing with his abusive trading strategy and froze assets in his name up to £1m, along with assets held by third parties. The freezing order was later amended by consent to cover one account with a balance of £1m. Under the terms of the settlement the order restraining Alexander from continuing his abusive trading strategy will remain in place, and the freezing order will be discharged after he has paid the FSA £700,000 in penalty and £322,818 for restitution to the three firms.
- The FSA’s investigations into the activities of Alexander were assisted by the London Stock Exchange.
- Under the Financial Services and Markets Act 2000 the FSA is empowered to seek injunctions and restitution orders against persons who have engaged in market abuse.
- The financial penalty was determined by the FSA in accordance with the guidance given in Chapter 6 of the Decision Procedure and Penalties manual (“DEPP”) as drafted at the time the body of Mr Alexander’s trading took place. The method of calculating the restitution payable by Alexander was determined by the FSA with input from Alexander’s legal advisors.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
The FSA hasn't been shy in issuing fines in the last couple of years. Alpari UK was fined for poor KYC management, City Index for transaction reporting and Activ Trades for funds segregation. FSA is keen to maintain its reputation as a leading financial body governing banking and financial markets products. 2010 saw the highest amount an individual was fined by the FSA; a staggering £2.8m for market abuse for manipulating investors and the stock price for Fundamental-E Investments (FEI). Margaret Cole, the regulator's director of enforcement, said: "This tough action shows that we are determined to keep dishonest cheats like Simon Eagle out of financial services."
Spread Betting is the equivalent of spot FX or CFD trading however there are significant cash advantages for UK based traders - its tax free. Furthermore as it’s a UK based product all contracts, margins, p&l are calculated in GBP.
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