The UK Financial Conduct Authority’s Market Watch report highlighted deficiencies in surveillance among contracts for difference (CFDs) providers. The report found that nine CFD providers in the country are not adequately addressing market abuse risks in non-equity asset classes.
Even though the regulator’s findings were mostly positive and showed that all the CFD providers under review had surveillance in place to detect insider trading, the watchdog still deemed some of these surveillance measures ineffective.
According to the CA, although these firms provide CFDs and spread bets for non-equity asset classes, they did not sufficiently assess the market abuse risks in these areas. They needed more specific information about market manipulation in all asset classes.
Poor Monitoring of Market Manipulation
The regulator discovered that the firms are failing to sufficiently detect and prevent the act of “narrowing the spread” of market manipulation. It involves traders attempting to manipulate the prices of spread bets or CFDs by placing buy or sell orders on security through direct market access (DMA) brokerage. The aim is to reduce the difference in price between buying and selling the security, which then influences the price of the CFD or spread bet.
Although some firms claimed to be unaware of the practice, the FCA stated that most were knowledgeable about it as they had submitted STORs. However, the risk assessments of all the examined CFD providers did not mention this practice, and none had implemented compliance-based surveillance to identify it.
The FCA explained that CFDs and spread bets are more susceptible to insider dealing due to their speculative and leveraged characteristics. As a result, they generate many Suspicious Transaction and Order Reports (STORs).
The regulator has noted that some individuals or firms may use spread bets and CFDs to profit by manipulating the market through other means.