‘Red flags’ over market abuse rise at asset managers during lockdowns

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

Unlike at banks, where an increase in “red flag” alerts over possible market manipulation or insider trading evaporated by the summer, the rate of suspicious events has remained elevated among investors, the figures suggest, with slightly less than 6 per cent of transactions setting off alerts. The findings come from data provided by some of the world’s biggest banks and fund managers with more than $20tn of assets under management.

The new data starkly contrast 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 difficulty companies have faced in trying to sift out potential bad behaviour by employees working away from offices kitted out with recorded phone lines and strict access to sensitive business, such as trading floors. 

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

Even so, the data suggest that working from home with looser controls over communications and less direct oversight from peers may create more fertile ground for wrongdoing in financial markets.

“[Banks] managed to react to the risk more quickly than the buy side,” said David Hesketh, founder of TradingHub. “It could also be that the banks have ramped up their investigations.”

Equities trading produces more alerts than in bonds and credit, he added, while insider trading is a more pressing risk than market manipulation. At banks, for which TradingHub has a smaller set of data, the rate of potentially suspicious trades has fallen back to about 2 per cent, from a rise up to 6 per cent when lockdowns first forced the financial services industry to work from home last spring.

TradingHub specialises in monitoring trades across a range of asset classes, generating daily reports on transactions that warrant further compliance checks.

Sometimes that may be because trade instructions appear to be so-called spoofs that traders do not truly intend to execute, or they may stem from what appears to be an unusually good run of luck — a possible indication that traders or investors have been acting on inside information.

Some of the alerts prove to be “false positives” under further investigation, the group said.

TradingHub has recently started building aggregate benchmarks to determine the average rate at which certain teams or asset classes generate suspicious activity, designed to help banks compare each other, allowing them and regulators to spot potential areas of concern

“The benchmarks show that, unsurprisingly, market abuse risk rose sharply in 2020 as a result of Covid-response remote working and elevated market volatility and illiquidity. Financial firms all responded to this threat to market integrity at varying speeds. However, these risks still remain above pre-Covid levels and firms need to remain even more vigilant against market abuse,” said Hesketh.

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

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

As the pandemic swept through Europe, the FCA warned that anyone handling inside information was expected to continue “to act in a manner that supports the integrity and orderly functioning of financial markets”. It is expected to report full numbers for 2020 in coming weeks.