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Market Manipulation Regulations in the U.S. and U.K

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Market Manipulation Regulations in the U.S. and U.K A PRIMER ON January 2021 Market Manipulation Regulations in the U.S. and U.K. Exchange Act §§ 9(a), 10(b); SEC Rule 10b-5 Art. 15 Market Abuse Regulation Securities Act § 17(a) §§ 89-91 Financial Services Act 2012 Commodities Exchange Act §§ 4, 6 and 9 § 2 Fraud Act 2006 Art. 5 REMIT CONTENTS I. WHAT IS MARKET MANIPULATION? ............................................................................................................................................................... 3 II. MARKET MANIPULATION UNDER U.S. FEDERAL LAW .............................................................................................................................. 5 A. Structure of U.S. Federal Market Regulators ....................................................................................................................................... 6 B. 1934 Exchange Act ....................................................................................................................................................................................... 6 1. Section 9(a) (15 U.S.C. § 78i(a)) – Prohibition Against Manipulation of Security Prices ......................................................... 7 a. “Matched Orders” and “Wash Sales” under Exchange Act § 9(a)(1) ............................................................................. 8 b. “Marking the Close” and “Painting the Tape” under Exchange Act § 9(a)(2) ............................................................. 9 c. Pump and Dump Schemes ..................................................................................................................................................... 10 d. Naked Short Selling .................................................................................................................................................................. 11 2. Section 10(b) (15 U.S.C. § 78j) – Regulation of the Use of Manipulative and Deceptive Devices .................................... 12 a. Market Manipulation Under § 10(b) and Rule 10b-5 ..................................................................................................... 13 b. A Safe Harbor for “Open Market” Transactions? ............................................................................................................. 15 c. Layering/Spoofing Under § 10(b) and Rule 10b-5 .......................................................................................................... 16 C. 1933 Securities Act .................................................................................................................................................................................... 17 D. 1936 Commodity Exchange Act ............................................................................................................................................................ 18 1. CEA Section 4(c)(1)-(4) (7 U.S.C. § 6c(a)(1)-(4)) – Prohibited Transactions .............................................................................. 19 2. The CEA’s Anti-Spoofing Provision ...................................................................................................................................................... 20 a. What is Spoofing? ...................................................................................................................................................................... 21 b. Evolving Theories of Liability for Spoofing ........................................................................................................................ 23 3. CEA Section 6(c)(1) (7 U.S.C. § 9(1))...................................................................................................................................................... 25 4. Section 9(a) (7 U.S.C. § 13(a)) – Violations generally ...................................................................................................................... 27 a. Manipulation Under CEA § 9(a)(2) (7 U.S.C. § 13(a)(2)) .................................................................................................. 28 i. Proving an Ability to Influence Prices ................................................................................................................................... 28 ii. What is an “Artificial Price”? ................................................................................................................................................... 28 iii. Proving Intent to Cause an Artificial Price .......................................................................................................................... 29 iv. Proving Causation ...................................................................................................................................................................... 29 E. Manipulation Involving Cryptocurrencies .......................................................................................................................................... 30 F. Extraterritorial Application of U.S. Market Manipulation Regulations ..................................................................................... 31 1. Exchange Act § 10(b) and Rule 10b-5 ................................................................................................................................................. 32 2. Commodity Exchange Act....................................................................................................................................................................... 34 III. MARKET MANIPULATION IN THE U.K. ....................................................................................................................................................... 355 A. Structure of U.K. Market Regulators .................................................................................................................................................. 355 B. E.U.’s Market Abuse Regulation .......................................................................................................................................................... 355 C. Financial Services Act 2012................................................................................................................................................................... 377 D. FCA Handbook ......................................................................................................................................................................................... 377 1. What’s a “Legitimate Reason”? ........................................................................................................................................................... 388 2. What’s a “False or Misleading Impression”? ................................................................................................................................... 388 E. Fraud Act 2006 ......................................................................................................................................................................................... 399 F. Regulation on Wholesale Energy Market integrity and Transparency ................................................................................... 399 G. “Spoofing” in the U.K. ............................................................................................................................................................................... 40 H. Manipulation Involving Cryptocurrencies .......................................................................................................................................... 41 I. Extraterritorial Application ...................................................................................................................................................................... 41 2 Rahman Ravelli Solicitors “The methods and techniques of manipulation are limited only by the ingenuity of man. The aim must be therefore to discover whether conduct has been intentionally engaged in which has resulted in a price which does not reflect basic forces of supply and demand.” -- Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971) I. WHAT IS MARKET MANIPULATION? Besides facilitating the transfer of stocks, currencies, futures, and other financial instruments between buyers and sellers, a basic function of financial markets is to allow participants to communicate information to one another about their subjective view of a particular instrument’s price. If a trader is willing to place an actionable offer to buy a Treasury futures contract for $X, for example, she is implicitly signalling to the market that, in her view, the contract is worth approximately that amount (at least insofar as buying it at that level relates to her overall position and trading strategy). By centrally aggregating the pricing opinions of many individual traders and investors, financial markets allow buyers and sellers to reach a rough consensus on an asset’s current market value (i.e., the approximate midpoint between supply and demand at any given moment). In this way, markets allow an asset’s price to be “discovered” through the transmission of the prices at which various buyers and sellers are willing to transact which, in turn, presumably reflect the proprietary analyses of those buyers and sellers about an asset’s value. As the US Supreme Court described this phenomenon, “[W]ell developed markets are efficient processors of public information. In such markets, the ‘market price of shares’
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