The Financial Conduct Authority (FCA) recently fined former Bank of America Merrill Lynch International Limited (BAML) bond trader, Paul Walter, £60,090 for engaging in market abuse.
The FCA found that Mr Walter had committed market abuse contrary to section 118(5) of the Financial Services and Markets Act 2000 (FSMA, now superseded by Articles 12(1)(a)(i) and Article 15 of the Market Abuse Regulation), by placing orders to trade which give a false or misleading impression as to the supply, demand, or price of an investment.
Mr Walter was a bond trader, with over 20 years’ experience, who at the time of the trading was employed by BAML. The Final Notice states that on 11 occasions between 2 July 2014 and 8 August 2014, Mr Walter entered a series of quotes for Dutch State Loans (DSL – a fixed income bond issued by the Dutch State Treasury Agency) on an electronic trading platform BrokerTec, that became the “Best Bid”. Other market participants, using algorithmic trading systems, tracked his quotes and raised their own bids in response to his Best Bid. Mr Walter then sold into the bids of other market participants before cancelling his own quotes. In doing so, on each occasion he sold the DSL, he sold at a higher price than he would have secured at that time, had he not posted a series of misleading Best Bid quotes and then sold through his own bid.
On one further occasion Mr Walter did the opposite by attracting market participants to follow him with the result that he purchased the DSL from the market participants who had recently lowered their offer price and then cancelled his own quote.
The FCA concluded that the market participants were affected by Mr Walter’s trading because his trading strategy manipulated their prices and led to them either buying or selling DSLs at worse prices than they would otherwise have done.
Mr Walter’s abusive trading resulted in a profit of €22,000 to his trading book. He did not profit personally from the trading.
The FCA found that Mr Walter did not know that his conduct amounted to market abuse, but considered that he was negligent in not realising that it did. The FCA state that
Mr. Walter did not intend to commit market abuse, as he did not intend or foresee that the likely or actual consequences of his actions would result in market abuse. However, the Authority considers that Mr Walter should have realised that his behaviour constituted market abuse”.
Although Mr Walter received what many would consider to be a substantial fine, it might have been greater if he were found to have deliberately or even recklessly committed market abuse. When determining the seriousness of market abuse, which is an important step in determining the level of fine and assessed on a sliding scale from levels 1 to 5, the FCA’s Decision Procedures and Penalty Manual (DEPP) 6.5C.2G(16)(c) states market abuse committed negligently or inadvertently is indicative (although by no means solely conclusive) of levels 1 to 3. DEPP 6.5C.2G(15)(f) states that market abuse committed deliberately or recklessly is indicative of levels 4 to 5.
Mr Walter's case was assessed at level 3, the FCA also finding DEPP 6.5C.2G(16)(a) (lack of profit) and DEPP 6.5C.2G(16)(b) (lack of effect on the market), which meant that he received a fine that equated to 20% of his yearly income preceding the market abuse.
It is easy to feel a considerable amount of sympathy for Mr Walter. He was, after all, cleared by his employer of any wrongdoing (albeit only in relation to three of the trading episodes), made a relatively small profit for his trading book and none personally, and the FCA’s own expert seems to have initially doubted whether his actions amounted to market manipulation. On the other hand, misrepresenting one’s true intention in order to sell or buy at an artificially inflated or deflated price, as the FCA alleged, falls squarely within the definition of market abuse, as defined by section 118(5) FSMA.