‘Red flags’ over market abuse rise among asset managers during lockdown

Possible market abuse in fund management companies accelerated globally after employees first worked from home last year and have not fallen completely back since, according to data from TradingHub, a monitoring group.

Unlike in banks, where an increase in “red flag” alarms over possible market manipulation or insider trading evaporated over the summer, the number of suspicious events has remained high among investors, the figures show, with just under 6 percent of transactions. from warnings. The results come from data provided by some of the world’s largest banks and fund managers with more than $ 20tn of assets under management.

The new data sharply contrasts the decline in the number of reports of suspicious trades and possible market abuse sent to the Financial Conduct Authority, the UK Financial Watchdog, in the first months after the pandemic forced thousands of traders to work from home.

It underscores the difficulties that companies have had in trying to find potentially bad behavior of employees working away from offices equipped with recorded telephone lines and strict access to sensitive businesses, such as floor trading.

Institutions that handle sensitive information, such as banks and asset managers, typically need to report any suspicious activity immediately. But campaign groups on privacy have warned about the level of intrusion from surveillance technology into employees at home.

Nevertheless, the data suggest that working from home with looser control over communication and less direct supervision from peers can create more breeding ground for abuse in the financial markets.

“[Banks] managed to respond faster to the risk than the buying side, ”said David Hesketh, founder of TradingHub. “It could also be that the banks have increased their surveys.”

Stock trading produces more alarms than in bonds and credit, he added, while insider trading is a more urgent risk than market manipulation. In banks for which TradingHub has a smaller set of data, the frequency of potentially suspicious trades has dropped back to approx. 2 percent from an increase up to 6 percent when the lockdown first forced the financial sector to work from home last spring.

TradingHub specializes in monitoring trades across a range of asset classes and generates daily reports on transactions that warrant further compliance checks.

Sometimes it may be because trading instructions appear to be so-called spoofs that traders do not really intend to perform, or they may stem from what appears to be an unusually lucky fortune – a possible indication that traders or investors have traded on inside knowledge.

Some of the warnings turn out to be “false positives” during further investigation, the group said.

TradingHub has recently begun building aggregate benchmarks to determine the average rate at which certain teams or asset classes generate suspicious activity, designed to help banks compare to each other so they and regulators can see potential areas of interest

“Benchmarks show that market abuse risk did not increase surprisingly sharply in 2020 as a result of remote control from Covid response and increased market volatility and illiquidity. Financial firms all responded to this threat to market integrity at varying speeds. However, these risks still remain above the levels before Covid, and companies need to be even more aware of market abuse, ”said Hesketh.

The number of “suspicious trades” reported to the UK FCA last year was 215 in April and 258 in May, the lowest number since stricter European rules came into force in July 2016, according to data from the regulator. The decline was due to fewer reports of potential insider trading.

At the time, the FCA said the number varied according to market conditions and activity, and there could be several reasons for the decline, including companies taking more robust steps to tackle the risk of economic crime.

As the pandemic swept through Europe, the FCA warned that anyone dealing with inside information is expected to continue “acting in a way that supports the integrity and orderly functioning of financial markets”. It is expected to report full figures for 2020 in the coming weeks.

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