Regulatory and enforcement agencies in the U.S. are taking increasingly aggressive positions as they try to control market manipulation and abuse. Shayne Ganeson of TradingHub takes a closer look at the year (so far) in market abuse regulation and enforcement.
The U.S. financial regulatory and enforcement community has been zealously trying to plug gaps in oversight that can lead to systemic and consumer risks. Headlined by JP Morgan Chase’s $450M data failure settlements, market manipulation bad actors have dominated the financial news cycle this year. At the same time, the Supreme Court decision striking down Chevron deference throws future regulatory and legal power dynamics into uncertain territory across sectors.
Meanwhile, some important SEC, FINRA and CFTC rules are headed to a financial institution near you in the autumn and into 2025. While regulatory agencies try to contain abuses buried in the complexity of capital markets, financial institutions may be operating in a trade surveillance deficit in their efforts to control and comply.
Last year, the SEC and FINRA were active in laying down new rules aimed at tackling market abuse, and those efforts will begin to make their presence felt this year and next. Most notably, the SEC made headlines with its new rule that affects short sale activity in equity markets to prevent high risk taking and manipulations, increase transparency and efficiency of the securities lending market and enable the SEC to assess unusual market events.
The agency also made waves with its exemption for certain exchange members in which almost all broker-dealers and proprietary trading firms will need to register with FINRA, because “securities trading today is highly automated, substantially more complex, and dispersed among many trading centers including 24 registered exchanges and a myriad off-exchange venues such as ATSs and OTC market makers.”
This year has also seen agencies back up their tough talk on off-channel communications, as well as trade surveillance recordkeeping and reporting, as evidenced by the series of penalties laid onto Goldman Sachs related to oversight to prevent market manipulation, including reporting with inaccurate trading data related to over-the-counter (OTC) equity securities.
The front office has also felt significant heat from the regulatory community as well with several of the highest-profile institutions seeing large actions levied against them. Regulators leveled enforcements against JP Morgan totaling nearly half a billion dollars for the institution’s inadequate trade surveillance, topped off by the CFTC’s $200 million penalty in May.
We also saw the conclusion to the ongoing Archegos saga, which culminated in the founder of family office Archegos Capital Management, Bill Hwang, being convicted in July of market manipulation. He lied to banks about the size of the derivative positions to artificially inflate the underlying stocks in the 2021 collapse of his $36 billion private investment firm.
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Read moreThis wave of enforcement actions was perhaps most notable because of the scramble that was caused in the wake of the JP Morgan case, which brought longstanding data governance oversights into the spotlight. Central to this enforcement action was that the firm failed to oversee billions of client orders due to the bank unwittingly missing 30 trading venues worth of data, a massive failure of data configuration and ingestion to say the least. This has catalyzed a massive refocusing of minds within the investing community about the state of their data capabilities and has given way to a huge data transformation push that will likely reverberate around the sector for at least the next 18 to 24 months.
“Uncertainty” has been the phrase dominating the financial sector so far this year. However, one thing that is very clear is that regulators are becoming increasingly keen on sniffing out market bad actors and are not afraid to take a more muscular stance when dealing out enforcement actions. In the face of this reality, the investment community needs to redouble its efforts to ensure that its existing controls are both watertight and that it is in a position to quickly adapt to emerging market abuse activity. If not, they need to brace for a potentially rocky — and costly — relationship with regulators moving forward.
Shayne Ganeson is global head of relationship management at TradingHub, a financial services technology provider. He previously served as a vice president at Credit Suisse and an analyst at Morgan Stanley.
