Market Watch 76 issued by the FCA strongly reiterates the regulator’s concern about both practices raised in Market Watch 57 as well as Market Watch 48.

Market Watch 48 published in June 2015 simply urged firms to pay more attention to how trading volumes are presented. Market Watch 57 was a change in narrative with the FCA sharing “requirements for firms” to inform and train staff about the advertising of prices that “are in fact fictitious” constituting potential market abuse, but also to have in place appropriate oversight and surveillance systems to detect and report this form of market abuse.

Market Watch 76 breaks a few years of silence and specifically calls out ‘flying’ and ‘printing’ suggesting that it has seen potential instances of these practices in several markets. The regulator is concerned about the commodities, fixed income and currency markets. It has also noted that in some instances prices entered in lit markets were used to generate order in dark markets.

According to Alex Viall, CSO at Global Relay, this Market Watch speifically highlights a problem identified in the FICC arena. “Until now there has been less regulatory focus on FICC from the FCA and other national regulators, especially from a market abuse perspective. I think we can safely predict that there is going to be a steadily increasing level of scrutiny from FCA of FICC for potential market abuse so we can expect some enforcement and heightened supervision for the bigger FICC players who perhaps have been quietly under the radar until now.”

‘Flying’ and ‘printing’

Both ‘flying’ and ‘printing’ involve communication with clients and market participants that is misleading and intended to create a “false impression of a financial instrument’s liquidity and / or price” in order to sway their decision making.

‘Flying’ involves misleading communication about bids or offers. ‘Printing’ involves misleading communication about trades executed at a specified price/size.

In both cases screen, instant message, voice or other methods are utilised as communication channels.

Both constitute conduct and practice that is unacceptable under MAR and MiFID II and may also constitute market abuse or a criminal offence.

The FCA is concerned not only about the financial harm to specific participants making decisions based on misleading or false information, but also about the integrity of and confidence in the market itself.

Firm management responsible for oversight

In Market Watch 57 the regulator made clear that firms should have in place appropriate systems and controls in order to ensure that employees do not engage in these misleading communication practices.

The FCA’s more recent observations suggest that firm management is “failing to deal with this behaviour in a robust and timely way.” The regulator has seen management failure to:

• recognize the risk of ‘flying’ and ‘printing’;
• implement appropriate surveillance;
• file STOR reports; and
• investigate potential misconduct in a timely fashion.

Where areas of concern have been identified a firm is obligated to conduct an assessment and inform the FCA promptly. And it looks like the FCA believes that this is not happening at all firms.

FCA recommendations for firms

The regulator expectations of firms can be broadly split into two areas: policy/staff and processes/systems.

Policy/staff

• Compliance manuals should include explicit prohibitions of engaging in ‘flying’ and ‘printing’.
• Annual attestations confirming comprehension and compliance should be obtained from staff.
• Firm expectation on culture and compliance should be effectively communicated.
• Firm training should include both the nature of ‘flying’ and ‘printing’ as well as the consequences for employees engaging in the practices.
• Enhanced training should provided to desks considered to be a higher risk.
• Disciplinary procedures should include clear and consistent processes for dealing with any misconduct identified.

Processes/systems

• Surveillance systems and processes utilized to identify and report both practices are robust including targeted surveillance to identify:
  • spread compression;
  • order cancellation rates;
  • order to trade ratios.
• Appropriate lexicons are embedded in e-comms surveillance systems

It is worth noting that while previously only chat platforms were mentioned in this context (specifically persistent chat channels between brokers), now other channels of communication as well as relevant lexicons are being highlighted.

Financial institutions should ensure that they have appropriate and adequate surveillance coverage because generic market abuse policies may no longer be deemed sufficient by the regulator. In practical terms this means lexicon reviews and enhancements to ensure that instances of collusion to create fictitious activity are caught – something that can often be overlooked when these tools are configured to capture more obvious offences like front running, wash or insider trading.

The regulator has also reiterated once again that commercial interests should not be the “drivers of outcomes” when it comes to potentially abusive or criminal practices.

GRIP comment

This is a warning shot for firm management as well as compliance functions and particularly those participating in the markets identified by the FCA. It does look like commodity and currency markets in particular are in the regulatory cross-hairs.

The failures listed by the regulator all relate to things already specifically highlighted in Market Watch 57 and Market Watch 76 makes similar recommendations to its predecessor. However, in this instance the language “firms may want to” does sound like a final warning, particularly considering the phrasing of the last paragraph: “Firms should take all steps to ensure compliance with relevant legislation, and make changes where gaps are identified. We will not hesitate to intervene when we suspect behaviour detrimental to confidence in, and the fairness of, UK markets.”

Given this language it is not unlikely that either more STOR visits or enforcement actions are on the horizon in the near future.

As with any other Market Watch there is an opportunity here to get ahead of any potential investigation by ‘getting your house in order’ so to speak. Many of the recommendations to firms do not only constitute pre-emptive measures in connection with ‘flying’ and ‘printing’, but also represent best practice for dealing with other potential areas of market abuse risk.

Flashing non-existent bids or fake trade levels may be tricky to capture, especially if these come from a single rogue trader. But leveraging of the mix of targeted lexicons for flying/printing and off-channel communications, as well as metadata-driven policies, may significantly enhance your ability to detect both practices and potentially mitigate the risk of someone “flying under your radar”.