IOSCO Report on Investigating and Prosecuting Market Manipulation (with Lofchie Comment)

The addendum to the "IOSCO Report on Investigating and Prosecuting Market Manipulation" provides information with regards to current tools and research being utilized to prevent or detect market manipulation. The addendum discusses the problems of finding against market manipulators using high-speed technology, and discusses some of the issues and considerations relating to cross-border cooperation. Some of the regulatory tools, and the "problems" with these tools (e.g., expense), that the report suggests are listed below:

• Recordkeeping obligations that require retention of audio tapes, in addition to audit trail records.

• Acquisition of "message data" or "order data" for unexecuted orders that may have impacted markets.

• The need for flexible, programming-based analytical tools to identify suspicious patterns of activity.

• Trader identification and monitoring actual position size across markets.

• The impact of increases in the volume of data that must be reviewed in detecting market manipulation.

• Difficulty in tracing orders and transactions, and in reconstructing important trading events.

• The need to regularly review and enhance alert criteria and parameters used by surveillance tools, and whether special alerts should be developed to detect low-latency trading such as layering, quote stuffing, momentum ignition and other pattern recognition alerts.

• Ensuring sufficient investment is made in market surveillance tools to properly monitor and supervise large quantities of transactions.

• Adequately maintaining the surveillance tools which are utilized.

• Providing for the high cost of ownership, maintenance and customization of these surveillance systems.

• Ensuring that regulators have highly skilled staff to conduct analysis of market conditions.

• Evaluating what can be done to improve market surveillance, taking into account different market structures, for example: imposing large trader reporting requirements, and using entity identifiers to identify trading on a participant by participant basis or to flag algorithmic/HFT orders.

• Monitoring the internet and fora such as chat rooms and blogs to detect market rumors and false or misleading information that may have an effect on the market.

The increased use of technology has increased the speed at which information is widely disseminated, and thus has potentially increased the speed at which manipulation can occur.

Lofchie Comment: Although the report is directed at regulators rather than at market participants, anyone involved in compliance activities relating to trading will find a review of the report useful. Certainly the list of challenges that government regulators face in doing their jobs mirrors fairly closely the challenges of in-house compliance.

View addendum in full here (links externally to IOSCO website).