Expert answers your market and trade surveillance questions

The fight against financial crime in market and trade surveillance is never-ending. New developments occur faster than ever, with new regulations implemented yearly. At the same time, criminals' strategies are evolving with new methods. And not least, AI is adding new methods of financial crime.  

In light of all these changes, there are always questions regarding new methods, examples, and best practices within market and trade surveillance. 

In this article, we've asked Per Friberg, Senior Financial Crime Surveillance Officer, some common questions we often encounter within market and trade surveillance.

Per has an investment banking background and extensive experience as a sales trader of European and US equities and derivatives. 

He has worked as a criminal investigator of market abuse at the Swedish Economic Crime Authority and the National Anti-Corruption Unit at NOA within the Swedish Police Authority. 

Questions about market manipulation

What is market manipulation?  

Market manipulation refers to deliberate actions to deceive or mislead investors by creating artificial price levels or volumes in financial instruments.

These activities distort the market's natural functioning, and the manipulator typically benefits at the expense of other market participants. 

Suppose the purpose of the orders and trades is to manipulate the price or mislead other market participants rather than wanting to actually buy or sell the instrument. In that case, it's considered illegal market manipulation. 

Some examples of market manipulation are: 

• Creating fake demand or supply for an instrument to influence its price. 
• Spreading false or misleading information about a company's financial health. 
• Simultaneously buying and selling the same instrument to create fake trading volume and attract investors.  

What are common methods of market manipulation?

Some common methods of market manipulation we usually notice are:  

1. Pump and dump: Inflating the price of a low-value stock with aggressive buying to gain momentum, sometimes combined with misleading positive information, then selling off when the price surges. 

2. Spoofing: Placing large orders on one side of the order book to create an illusion of heavy demand or supply, then cancelling them shortly after execution on the other side of the order book.  

3. Wash trading: Simultaneously buying and selling the same security to create fake trading volume to attract investors.  

4. Marking the close: Manipulating a stock's price just before the market closes to influence the closing price, typically at the end of the month or year.  

Questions about insider trading 

What is insider trading?  

Insider trading is the illegal buying or selling of financial instruments based on inside information.

Inside information is precise information that has not been made public and relates (directly or indirectly) to one or more issuers or financial instruments. If made public, it would significantly affect the prices of the financial instruments or their derivatives. 

How to avoid insider trading?  

While it can be difficult to avoid insider trading, there are some steps companies can take to reduce the chance of it happening: 

1. Non-disclosure of inside information: Never share confidential information with friends, family or colleagues and avoid discussing sensitive business plans in public.  

2. Comply with the company's guidelines: Follow trading blackout periods and pre-clear trades with your compliance team.  

3. Implement a need-to-know policy: Use "Chinese walls" within the organisation to restrict access to sensitive information and keep a log of who has been given access to inside information and why. Moreover, you should only give relevant personnel access to insider information.  

4. Regular training and awareness programmes: Conduct annual workshops on handling inside information and insider trading rules.  

Questions about trade surveillance 

What is trade surveillance?  

Trade surveillance refers to systems and processes that monitor trading activities, ensuring they comply with laws and regulations.

It helps identify irregularities, such as market manipulation, insider trading and other unethical or unlawful behaviour.  

Is market surveillance the same as trade surveillance?  

No, market surveillance isn't the same as trade surveillance, but they are related by using similar technology and monitoring methods.

Market surveillance encompasses a broader scope, monitoring market-wide trends and market participants, price movements, and news-driven events to detect anomalies and illegal behaviour. 

Trade surveillance focuses specifically on monitoring orders, trades, and account-level behaviour to ensure compliance with market abuse regulations.    

What are some best practices for market and trade surveillance compliance? 

Some best practices for market and trade surveillance include:  

1. Use of technology 

Invest in modern, advanced technology and continuously set requirements for improvements and new functionalities. 

Solutions like Trapets Market and Trade Surveillance help compliance teams manage the high volumes of trading data to efficiently detect and report suspicious cases of market manipulation and insider trading. 

2. Policies and procedures 

Set clear policies and procedures with written guidelines for detecting and reporting suspicious market abuse and other violations. 

3. Training and education 

Provide employees with regular updates on evolving market regulations and training on new system features. Additionally, follow legal cases and judgments for instances of market abuse.  

4. Collaboration with regulators and other market participants 

Maintain open communication with the Financial Supervisory Authority and the Economic Crime Authority to stay updated on compliance expectations and priorities within supervision.  

Maintain a network of compliance teams among other market participants to share knowledge, ideas and insights regularly.