Market Abuse : A Survey

Abstract: The purpose of this study is to give an overview of how rules are broken in and at places connected to financial markets, such as the stock market. The approach is aimed at answering the following questions: Who are the investors and traders in the market, who are the market actors? How are financial market prices and quantities being changed in ways not allowed in the market, i.e., how are prices and quantities manipulated? What kind of harm is done to actors in the markets? How can market abuse, the breaking of market rules, be prevented? The findings for the first question divide the market actors into two groups, based on the amount of information they possess: Insiders, who have access to and can use information from inside of companies; and outsiders, who do not have insider information. The second question is answered in detail by describing how manipulation is happening at two places: at the markets, and outside, where four types of market manipulation techniques are used by those who manipulate the markets. The third question asked leads to looking upon harm as coming from a form of “theft.” If, for instance, actors lose wealth in the market because of manipulation, it can be argued that actors are harmed because of wealth is being “stolen”. Outsiders risk losing wealth and opportunity of future profits as a result of manipulation, and manipulation may even cause suffering for people who are not invested in the market. Manipulation is a problem in the developed markets and may be an even more pressing concern for emerging markets. When market actors lose trust because of market abuse and manipulations it may lead to decreased investments and trading. The last question dealing with how market abuse can be prevented aims to avoid harm falling upon individuals, businesses, institutional investors, and state investors. There seems to be a need to combine efforts, for market actors, investigators of fraud, and regulators, to use several harm-preventing measures, i.e., practical tools, to protect the investors, their market trust and assets, to safeguard a functional market.