3.2) Integrity of Capital Markets II (B): Market manipulation

Question 1

What substandard 2(B) market manipulation state?

Answer 1

Must not engage in practices that distort prices, mislead market participants or artificially inflate trading volumes.

Question 2

How is 2(B) market manipulation implemented for members? (3)

Answer 2

• Artificially influencing prices or trading volumes on the market is prohibited.
• Do not spread false rumours or provide misleading info.
• Legitimate transactions include trades for tax purposes (e.g. selling and immediately re-buying a share), or affecting the price when trading in an illiquid share.

Question 3

What is key in implementing market manipulation?

Answer 3

Intent is key. If activities are intended to mislead others, then the Standard is violated.

Question 5

Example 17: Bright Asset Managers are rewarded if the funds that it manages outperform the market as measured at the end of each quarter. Two weeks
before the end of each quarter, Bright starts trading the dominant small cap shares in its funds between these funds. Bright makes sure that it constantly increases the share prices at which it trades the shares between it funds, resulting in the value (on paper) of its funds being far higher than it would otherwise have been. This consistently results in the appearance of betterthan-market performance, and therefore in higher fees being charged to clients. Is this activity compliant with Standard II(B)?

Answer 5

Solution: Bright is clearly trying to mislead its clients through market manipulation, and is therefore in contravention of Standard II(B). This is costing its clients money (higher fees), and is also giving them a false impression of their wealth and of the abilities of Bright Asset Managers.

Question 6

Example 18: Mel Dixon is the senior portfolio manager at Money Magic. Some of her clients hold Yellow Sky, an IT company, in their discretionary portfolios. Dixon
wants to sell out of Yellow Sky, so that she can use the proceeds to buy herclients a large block of Elevencent (her current favourite company) which has just come onto the market. However, upon doing the necessary calculations, she realises that at the current Yellow Sky share price her plan will not work. She therefore asks Bruce Peters, a well respected IT analyst, to issue a positive earnings update on Yellow Sky, in the hope that this will push up its share price. Peters agrees and two days later, without any research to back this, he issues a
positive update on Yellow Sky. Due to Peter’s standing in the industry, Yellow Sky’s share price increases by 10% over the next week. Have Dixon and Peters violated Standard II(B)?

Answer 6

Solution: Both Dixon and Summers are guilty of contravening Standard II(B) by engaging in behaviour designed to mislead the market, even though Melanie is
doing this in the interests of her clients.