Market Abuse Definitions Flashcards
What are the types of market abuse?
Prohibited use of inside information and market manipulation.
What is market abuse?
Market abuse is a mode of unfair treatment in the market, where one party taking part in the transaction takes advantage of the other, generally because he has more information than the other.
What is inside information?
This is price sensitive information. For example that the company is about to launch a new product that is going to be successful, that the company is going to make unusual high products, that the company is going to incur substantial losses, a merger with another company….
How can insider information be misused?
There are two ways: through insider trading, or through tipping.
What are companies required to do when they have price sensitive information?
They are required to disclose it to the market, by means of a company announcement. The market needs to know in order to allow investors to make an informed investment decision. Without disclosure of information, investors cannot make an informed investment decision.
What is insider trading?
Insider trading is the buying or selling of a security by someone who has access to material, non public, price sensitive information about the security. A reasonable investor would be likely to use this information as the basis of an investment decision. Hence, whoever trades using this information has an unfair advantage over the unprivileged investor who does not have access to this information.
Trading on the basis of inside information is illegal. You cannot trade using inside information. Why?
Because it would lead to an unfair market, where certain investors have knowledge and information which is not available in the market, and they’re using that information to trade. They obtained that information because of the advantageous position they have within the company.
What is insider tipping?
This is when management passes on insider information to a third party, who then uses this information to trade. By doing this, the third party has an unfair advantage over other investors who are not exposed to management.
What is market manipulation?
Market manipulation refers to the creation of a false impression of reading activity, price movement, or market information. There are two main forms of market manipulation: transaction based manipulation and information based manipulation.
What is trading based manipulation?
These are false orders to trade, or misleading orders to trade, which only have the purpose of pushing up the price. For example, suppose investor A has 100 000 shares in a company, worth €1 each. Suppose investor A wants to double the price of his shares. Investor A agrees with investor B and C to trade see shares on the market to push up their price. Investors B and C put buy and sell orders on the market at €1.20. Their orders match and a transaction is made, so the price goes up to €1.20. The next day they do the same thing, but at €1.30, then €1.40, ect.. Until they reach the desired price. Note that this is a simplistic example, and in reality, many orders at many different prices are made.
Unless you can prove a connection between these investors, you cannot prove market manipulation. Thus, it is very difficult to prove transaction based market manipulation.
What is information based manipulation?
This is the publishing of false or misleading information in the media, ie giving out false rumors to take advantage of the market, in order to make a profit. For example, a company says that their profit margin is going to go up because they are going to launch a new product, to attract investors invest in their company. The price of their securities up, but they don’t actually launch a product.
