2. Agenda
• Foundation of the Directive and main scopes
• Harmonization level
• Economic rationale
Introduction • Tools used
• Inside the market manipulation possible abuses
• What kind of abuses are possible? Are there any exceptions?
• Some useful examples
• Factors and signals suggested by CESR (ESMA)
• Sanctions and controls
Core section
• Where is the “intention”? Dual system penalties process?
• Comments on the Directive body and structure
• Bibliography
Conclusion
2
3. Introduction Core section Conclusion
Background of the Directive 2003/6/EC
• The Commission’s Financial Services Action Plan in 1999 has
clearly stated as a priority of the EU legislation the need for a
new set of rules to better match the most recent market
evolution
• The new Directive compared with the IDD (Insider Dealing
Directive) has a wider scope and aims at strengthening the
regulatory enforcements
• The EU has developed an innovative set of rules to define and
regulate the market abuse using the USA common law
experience
• The Lamfalussy Report on the Regulation of European
Securities has defined the modus operandi to form regulation
3
5. Introduction Core section Conclusion
The Market Abuse Directive
[L1] Art 5
“Member States shall prohibit any person
from engaging market manipulation”
• The Directive 2003/6/EC recognized market manipulation as a
criminal offence for the first time
• The CESR involvement has been active and has been focusing
on providing guidelines useful to better understand the
underlying hypotheses and aims
• Present development and some empirical evidence shown by
recent CESR surveys are suggesting to reform the Directive
Directive 2003/6/EC 5
6. Introduction Core section Conclusion
Harmonization level of the Directive
[L1] “Whereas:
1) A genuine Single Market for financial services is crucial for
economic growth and job creation in the Community.”
• The first reference made by the Directive is on the need of
maximum harmonization
• The position given to such statement shows the great importance
attributed by the Commission to overcoming the divergences of
national regulations
• Many scholars motivate the importance of maximum
harmonization with the subsidiary principle which ensures a
reduction of transaction costs
Directive 2003/6/EC 6
7. Introduction Core section Conclusion
Values pursued by the Directive
(cont’d)
“2) An integrated and efficient financial market requires market integrity.
The smooth functioning of securities markets and public confidence in markets
are prerequisites for economic growth and wealth. Market abuse harms the
integrity of financial markets and public confidence in securities and
derivatives.”
• Those consideration came out from CESR and the Consultation
Working Group papers based on the description of some
distortions showed in the futures and commodity markets
• As the comments show, there is a direct reference to the
necessity to ensure market efficiency and integrity, which are
considered key elements to ensure economic growth and
prosperity
Directive 2003/6/EC 7
8. Introduction Core section Conclusion
Dir. No. 2003/6/EC - Article 9
- This Directive shall apply to
any financial instrument
admitted to trading on a
MAD regulated market in at least
one Member State(…)
irrespective of whether or
not the transaction itself
actually takes place on that
market
Main goals
Market
of the EU are: High market
efficiency transparency
economic growth
and integrity
and employment
Guidelines to
be followed by
market Administrative
supervisors to and penal
sanctions
set up
procedures
The European Market Abuse Directive. Ferrarini 8
9. Introduction Core section Conclusion
What is Market manipulation?
"Manipulation is difficult to define,
but manipulative practices and
schemes are usually readily
identifiable”
There is no generally accepted
definition of the term market
manipulation. Although manipulation is
prohibited under a number of statutes in
overseas jurisdictions, it tends not to be
defined precisely.
Vivien Goldwasser, Stock Market Manipulation
and Short Selling. Centre for Corporate Law and 9
Securities Regulation, 1999, 154
10. Introduction Core section Conclusion
Market manipulation according to the
Directive 2003/6/EC
1 Transaction - based manipulation
a. False or misleading transactions (unless AMPs)
b. Price positioning (unless AMPs)
c. Transactions involving fictitious devices/deception
2 Information - based manipulation
a. Dissemination of false and misleading information
The European Market Abuse Directive. Ferrarini 10
11. Introduction Core section Conclusion
1. Transaction - based manipulation
a. False/ misleading transactions ([L3], CESR/04-505b)
“transactions or orders to trade… which give, or are likely to give,
false or misleading signals as to the supply of, demand for or price
of financial instruments” [L1], Art. 1(2)(a)(ind 1)
These are fictitious transactions, in respect of which
“manipulation is best understood as a species of fraud” (Fischel
and Ross, 1991)
Practical examples:
• Wash trades
• Painting the tape
• Improper matched orders
• Placing orders with no intention of executing them
Directive 2003/6/EC 11
12. Introduction Core section Conclusion
1. Transaction - based manipulation
a. False/ misleading transactions ([L3], CESR/04-505b)
Case study:
Suppose that Mr Laudani owns securities of a particular
company, which are, however, disregarded by the financial
press and other investors. Therefore Mr Laudani “sells” his
securities to one of his companies and “reacquires” them
immediately in order to create some artificial market
activity.
Has Mr Laudani committed market manipulation?
Siems, 2007 12
13. Introduction Core section Conclusion
1. Transaction - based manipulation
a. False/ misleading transactions ([L3], CESR/04-505b)
Case study:
Yes, Mr Laudani has committed market manipulation.
If there is no change in (beneficial) ownership, this “wash
sale” can be market manipulation under Art. 1(2)(a)(ind 1). In
order to constitute a false or misleading transaction it is
necessary that Mr Laudani’s manipulation was successful. This
means that his artificial market activity has to increase the demand
in the securities. Usually this will be the case unless other
market participants have completely counter-balanced Mr
Laudani’s mispricing.
Siems, 2007 13
14. Introduction Core section Conclusion
1. Transaction - based manipulation
b. Price positioning (unless AMPs) ([L3], CESR/04-505b)
“transactions or orders to trade… which secure, by a person, or
persons acting in collaboration, the price of one or several
financial instruments at an abnormal or artificial level”
[L1], Art. 1(2)(a)(ind 2)
Practical examples:
• Marking the close
• Colluding in the after market of an Initial Public Offer
• Abusive squeeze
• Creation of a floor in the price pattern
• Excessive bid-ask spreads
• Trading on one market to improperly position the price of a financial
instrument on a related market
Directive 2003/6/EC 14
15. Introduction Core section Conclusion
1. Transaction - based manipulation
b. Price positioning (unless AMPs) ([L3], CESR/04-505b)
Real life example:
• Nelson Bunker and William
Herbert Hunt were two Texan
brothers which owned a
hedge fund and started
investing in silver to hedge
from inflation
•In August 1988 they were
convicted with the accusation
of conspiring to manipulate
the market
15
16. Introduction Core section Conclusion
1. Transaction - based manipulation
b. Price positioning (unless AMPs) ([L3], CESR/04-505b)
Real life example:
• Their strategy was to
suddenly buy a great quantity
of future contracts and hold
them until maturity, collecting
the underlying
•Between 1973 and 1980, the
silver price rose from the
$3-range to the $50 one per
ounce and they eventually
possessed almost 50% of the
world deliverable supply
16
17. Introduction Core section Conclusion
1. Transaction - based manipulation
c. Transactions involving fictitious devices/deception ([L3], CESR/04-505b)
“transactions or orders to trade which employ fictitious devices or
any other form of deception or contrivance” [L1], Art. 1(2)(b)
Practical examples:
• Concealing ownership
• Dissemination of false or misleading market information through media
[…]. This is done with the intention […]
• Pump and dump
• Trash and cash
• Opening a position and closing it immediately after its public disclosure
Directive 2003/6/EC 17
18. Introduction Core section Conclusion
1. Transaction - based manipulation
c. Transactions involving fictitious devices/deception ([L3], CESR/04-505b)
Case study:
Mr Laudani’s securities are just “penny stocks”. Mr Laudani
agrees to sell, and Miss Baiocco agrees to buy, these securities
at rising prices. After a few weeks time the price of the
securities is twenty times the original price. Now, Miss Baiocco
sells all of her securities.
Has Mr Laudani committed market manipulation?
Siems, 2007 18
19. Introduction Core section Conclusion
1. Transaction - based manipulation
c. Transactions involving fictitious devices/deception ([L3], CESR/04-505b)
Case study:
Yes, Mr Laudani has committed market manipulation.
This form of market manipulation is called “pumping and
dumping” : the buyer and seller act in collaboration to push
the price of a security to an artificially high level and
subsequently the buyer sells it for profit. Typically the security
in question is an illiquid one – like a penny stock – so its price
level is easy to manipulate.
Siems, 2007 19
20. Introduction Core section Conclusion
2. Information - based manipulation
a. Dissemination of false and misleading information ([L3], CESR/04-505b)
“dissemination of information through the media… or by any
other means, which gives, or is likely to give, false or misleading
signals as to financial instruments… In respect of journalists when
they act in their professional capacity such dissemination of
information is to be assessed… taking into account the rules
governing their profession, unless those persons derive, directly or
indirectly, an advantage or profits from the dissemination of the
information in question.” [L1], Art. 1(2)(c)
Practical examples:
• Spreading false/misleading information through the media
• Other behaviour designed to spread false/misleading information
Directive 2003/6/EC 20
21. Introduction Core section Conclusion
2. Information - based manipulation
a. Dissemination of false and misleading information ([L3], CESR/04-505b)
Case study:
The CEO of a company deliberately publishes incorrect
price-relevant information about his company on its
webpage.
Has he committed market manipulation?
Siems, 2007 21
22. Introduction Core section Conclusion
2. Information - based manipulation
a. Dissemination of false and misleading information ([L3], CESR/04-505b)
Case study:
Yes, the CEO has committed market manipulation.
This situation is a straight-forward case of market
manipulation under Art. 1(2)(c). The CEO has published
false information which gave a false signal as to financial
instruments and he knew that the information was false.
It does not matter whether he made any personal profit
from this false information.
Siems, 2007 22
23. Introduction Core section Conclusion
2. Information - based manipulation
a. Dissemination of false and misleading information ([L3], CESR/04-505b)
Case study:
Suppose that a journalist, who read the information on the
webpage, publishes it in his newspaper.
Has he also committed market manipulation?
Siems, 2007 23
24. Introduction Core section Conclusion
2. Information - based manipulation
a. Dissemination of false and misleading information ([L3], CESR/04-505b)
Case study:
It depends on several factors.
In general everyone can commit market manipulation by false or
misleading information, if he or she could have known that this
information was false. However, for journalists this may lead to
unbearable risks. Therefore, the Directive states that with respect to
journalists the rules governing their profession have also to be taken
into account, unless the journalist derived profits from the
dissemination of the information. Thus, it also depends on this
criterion as well as the national press law whether there is market
manipulation.
Siems, 2007 24
25. Introduction Core section Conclusion
2. Information - based manipulation
a. Dissemination of false and misleading information ([L3], CESR/04-505b)
Real life example:
•Maria Bartiromo and David Faber,
anchors and interviewers of the CNBC,
were accused of communicating on air
reserved information about upgrading
and downgrading of stocks in analysts
reports, also thanks to the collaboration
of Jim Cramer, editor of the Smart
Money magazine and owner of the
Cramer, Berkowitz & Co. hedge fund.
•Accusations were unpunished because
the journalist position was unclear under
USA law. 25
26. Introduction Core section Conclusion
Exceptions
Accepted Market Practices (AMPs)
Only to [L1]
Art. 1.2 (a)
(ind 1/2)
Safe Harbors
Common interest
To all MAD
26
27. Introduction Core section Conclusion
Accepted Market Practices (AMPs)
Article 1.2 of MAD: “Market manipulation‟ shall mean:
(a) Transaction or order to trade: …
unless the person who entered into the transactions or issued the orders to trade
establishes
that his reasons for so doing are legitimate and that these transactions or orders
to trade
conform to accepted market practices on the regulated market concerned…”
Article 1.5 of MAD: “AMPs shall mean practices that are reasonably expected in one or
more financial markets and are accepted by the competent authority in accordance
with guidelines adopted by the Commission in accordance with the procedure laid
down in Article 17(2).”
Hypotesis: Under the Italian Regulator
[L1]
[L1]
[L4]
AMPs
- Legitimate Reasons (Acceptance by CONSOB 2009):
- Conform to AMPs of -Liquidity Enhancement Agreements
the Member State -Purchase of own shares to set up a
shares warehouse position
27
28. Introduction Core section Conclusion
Safe Harbors
Article 8 of MAD: “The prohibitions provided for in this Directive
shall not apply to trading in own shares in „buy-back‟ programmes or
to the stabilisation of a financial instrument provided such trading is
carried out in accordance with implementing measures adopted in
accordance with the procedure laid down in Article 17(2).”
AMPs ≠ Safe Harbors
Safe Harbors are a sort of super strong cases of AMPs. In fact, AMPs do not
need the psychological elements and are the same for all MSs.
You must satisfy strong requirements if you want this exception to be
applied (REG. EC 2273/2003)
28
29. Introduction Core section Conclusion
Common interest (1)
Article 7 of MAD: “This Directive shall not apply to transactions
carried out in pursuit of monetary, exchange-rate or public debt-
management policy by a Member State, … or by any other officially
designated body ...”
Real life example:
•In 2008, Mr Berlusconi states: "O si fa
Alitalia o si muore (…) Cordata italiana
in 3-4 settimane.”
•As a result, Air France exits from the
negotiation to acquire Alitalia.
29
30. Introduction Core section Conclusion
Common interest (2)
•Finally, it was decided that
“nell’esporre pubblicamente i suoi
convincimenti e l’orientamento della
sua parte politica sulla situazione
dell’Alitalia non ha diffuso notizie false
ne’ posto in essere artifici, ma ha
esercitato le sue legittime prerogative
di politico e di parlamentare (…) (su
una) questione di interesse generale e
ragionare diversamente significherebbe
limitare arbitrariamente la liberta’
degli esponenti politici di qualunque
parte politica di dibattere
pubblicamente”.
30
31. Introduction Core section Conclusion
Possible Signals of Market Manipulation
Transactions (1)
False or misleading transactions and Price positioning
(Level 2, Art. 4 2003/124/EC)
•orders to trade given or transactions undertaken represent a significant
proportion of the daily volume or transactions…
•orders to trade given or transactions undertaken by persons with a
significant buying or selling position in a financial instrument lead to
significant changes in the price…
•no change in beneficial ownership…
•orders to trade given or transactions undertaken include position reversals
in a short period and represent a significant proportion of the daily volume
… and might be associated with significant changes in the price…
•orders to trade given or transactions undertaken are concentrated within
a short time span in the trading session and lead to a price change which
is subsequently reversed…
•orders to trade… are removed before they are executed
•orders to trade are given or transactions are undertaken at or around a
specific time when reference prices, settlement prices and valuations are
calculated…
Level 2, Art. 4 2003/124/EC; Level 3, CESR/04-
31
505b
32. Introduction Core section Conclusion
Possible Signals of Market Manipulation
Transactions (2)
Transactions involving fictitious devices/deception ([L2],
Art. 5 2003/124/EC)
•orders to trade given or transactions undertaken by
persons are preceded or followed by dissemination of
false or misleading information by the same persons…
•orders to trade are given or transactions are
undertaken by persons before or after the same persons
or persons linked to them produce or disseminate
research or investment recommendations which are
erroneous or biased…
Level 2, Art. 4 2003/124/EC; Level 3, CESR/04-
32
505b
33. Introduction Core section Conclusion
G e n e ra l C o m m e n t s L i m i t s o r G r e y A r e a
The MAD poses Some scholars have
some conflict questioned the
The lack of with the general capability of some MS
reference of right of freedom Supervisory (Lithuania)
intention as a of communication to monitor and
ratio to effectively prohibit
Market abuse
determine
criminal offence
Some scholars have
Some scholars have noticed that the
criticized the moral Harmonization level
instance of MAD values
and rules. It doesn’t granted by the MAD
follow a more isn’t maximum since
economical rational the MS retain some
discretion
Since AMPs are
defined by MS
The MAD and authority, there will
MiFID have some
overlapping Problems be the problem of
how judge conflict
regulatory issue
between MS
differences
34. Introduction Core section Conclusion
This attitude emerge The “Doroty complex” is a
even in the comment of constant of the UE recent
the CESR (ESMA) to the directive. However it The problem of the
implementation policy. doesn’t pose big problem prevalence of moral
It suggest to avoid to in this case since the two on economical
define by law behavior directive share same rational isn’t
general intent: enhance
the transparency
solvable
Even if AMPs pose some
problem their existence
is well explain by the
attempt of UE to create
a best practice and not
to define strict rules Solution
“attempted”
Even if the directive left Since many jurisdiction needs
some discretion power intention to assess penal
to MS the general idea is offence, many country (such as
that there is a strong Italy and France) have developed
convergence between a dual system between penal
MS, hence should be (intention needed) and
granted an appropriate administrative (objective
harmonization level responsibility)
ESMA may help and The MAD grants
coordinate the exception for
“weaker” MS journalism, but it
authority in must be sure that
detecting and set there is no
up a best practice economical benefit
34
35. Introduction Core section Conclusion
Is it working?
994 Sanctions applied of which:
Imprisonments warnings
Criminal fines
Administrative warnings
Administrative fines
0 100 200 300 400 500 600 700
Highest administrative fine applied: from EUR 64 to 7 million.
Highest criminal fine imposed: from EUR 671 to 0.15 million
Longest term of prison sentence: from 50 days to 10 years
Opportunities for the Market Abuse Directive
35
Revision
36. Introduction Core section Conclusion
Bibliography
• AVGOUELAS, The emerging EU Regime for the Regulation of Market Abuse, 2005 (pages 276-
306)
• ENGLE, Insider trading in US and EU Law: a comparison (pages 1-33)
• DI NOIA, Reviewing Market Abuse regime: some indications from the ESME report. EU
Commission Conference, Bruxelles, 2008
• FISHEL, and ROSS, Should the Law prohibit "Manipulation" in Financial Markets? 105 Harv. L.
Rev. 503 (1991)
• G. FERRARINI, The European Market Abuse Directive, in 41 Common Market Law
Review, 2004, 724-728 ( 3.3.)
• SIEMS, The EU Market Abuse Directive: A Case-Based Analysis, 2007 (pages 1-27)
• V. GOLDWASSER, Stock Market Manipulation and Short Selling. Centre for Corporate Law and
Securities Regulation, 1999
36
37. Introduction Core section Conclusion
Bibliography
DIRECTIVES: Regulation: CESR
- 2003/6/EC - EC 2273/2003 - 04-505b
- 2003/124/EC - 02-089d
- 2003/125/EC - Acceptance by CONSOB on 19 March
- 2004/72/EC 2009. ACCEPTED MARKET PRACTICES
- 2004/109/EC - Looking at the future of Market Abuse
Enforcement. Carlos Tavares, Vice
Chairman of CESR. Brussels, 2008
ESME Report
-Market abuse EU legal framework and its implementation by
Member States: a first evaluation. Brussels, 2007
European Commission - Internal Market & Services
DG
- Reviewing the Market Abuse Regime. Brussels, 2008
37
