The 7 Behaviours That Qualify As Market Abuse

Even with a solid understanding of the Market Abuse Regulation (MAR), it may still be difficult to understand what is considered market abuse. That’s why we decided to create this guide that covers the seven behaviours that qualify as market abuse. This is an important aspect of the regulation because being accused of one of the behaviours can lead to fines which can amount to millions of euros. Furthermore, market abuse sanctions can extend to imprisonment and cessation of business.

1. Why seven behaviours that qualify as market abuse?

MAR is a regulatory framework. As such, it is meant to set clear expectations and that’s why it starts by defining the three categories of market abuse: 

• Insider Dealing – Taking advantage of inside information in order to generate profit by making, changing, or cancelling deals.
• Unlawful disclosure of inside information – Releasing inside information to the public without appropriate permissions.
• Market manipulation – An umbrella term for a series of actions which can distort market performance and mislead investors.

Unlawful disclosure then has three sub-categories of behaviour, also known as expectations. Insider dealing has four. By addressing these as individual items, we can more clearly address our own conduct and take steps to eliminate dangers.

2. Key takeaways

• There are two main categories of market abuse: insider dealing and unlawful disclosure. These are divided into 7 sub-categories.
• Behaviour 1: Insider dealing is using inside information unlawfully. Compliance is easily handled through the proper use of insider lists.
• Behaviour 2: Unlawful disclosure is sharing information with those who should not be a party to it. Compliance is largely achieved through carefully deciding what could reasonably be shared in social contexts.
• Behaviour 3: Misuse of information applies in the event that you use information in your possession in an unlawful way. This is a ‘catch-all’ term that aims to enforce best practices according to all standards set by MAR.
• Behaviour 4: Manipulating transactions involves falsely influencing transactions to create a different result. Compliance here involves multiple actions you should avoid, e.g. wash trades.
• Behaviour 5: Manipulating devices is a way of falsely affecting transactions. Compliance can be achieved through various actions, all focused on integrity.
• Behaviour 6: Dissemination applies to the unlawful sharing of information with the intention of misleading. Again, many of the ways to ensure compliance focus on acting with integrity.
• Behaviour 7: Distortion and misleading behaviour catches all other such actions which aren’t covered by the above points. Again, integrity is at the core of compliance.
• Sanctions for failing to comply with MAR can include fines up to €15 million euros and imprisonment. 
  

3. The seven behaviours that qualify as market abuse 

Going through the full text of MAR can be quite a lengthy read. Luckily, the European Securities and Markets Authority (ESMA) has, so far, created two annual reports on, what it calls, “accepted market practices (AMPs)”. These AMPs are what we have then translated into the seven behaviours, simplifying a complex legal standard.

When we look at these behaviours, within the context of penalties and how to protect yourself from making a mistake (or being caught up in someone else’s unlawful behaviour), there’s one single overriding element of good practice. This is to keep accurate records.

Throughout this article, we frequently refer to the UK’s Financial Conduct Authority (FCA) but we also look at the implementation in other EU member states. We use examples from the FCA because they have a comprehensive and easy to understand handbook for businesses and individuals who need to be aware of MAR. 

Let’s take a look at the seven behaviours detailed in the FCA MAR Handbook:

3.1 Insider dealing

Simply put, insider dealing is using inside information that you have in your possession to deal (or attempt to deal). MAR Article 8 covers insider dealing. The Danish National Competent Authority, Finanstilsynet, also provides excellent resources for MAR understanding. Like the FCA, they break insider dealing down to three main behaviours:

Front running/pre-positioning:
This is a transaction for an individual’s own benefit in advance of an order, taking advantage of the knowledge of the upcoming order.

Takeover ‘offerer’:
This is an offerer using inside information from a proposed bid, knowing the implications on shares.

Acting for an offerer:
This is using the knowledge gained as a result of acting on behalf of an offerer for your own benefit.

To fully understand this behaviour, we need to understand what inside information is. Such information applies, both directly and indirectly, to precise information which has not been made public, but if it was, it would have a significant effect on the price of particular issuers or instruments. The European Securities and Markets Authority (ESMA) provides detailed guidelines, in a question format, to further explain what constitutes inside information in detail (see section 5).

3.1.1. How to ensure compliance regarding inside information

We recommend going through the relevant MAR advice within the specific EU country. This is usually available from the local National Competent Authority, like the FCA handbook in the UK. Links to all of the local authorities can be found here. We recommend this for compliance with all seven behaviours.

Crucially, with insider dealing, you’ll discover that compliance doesn’t just refer to your own dealings. It also applies to you encouraging others to deal using inside information. Here are some quick tips for ensuring compliance:

• Undertake due diligence on all employees and value a culture of integrity and responsibility, including having a market abuse policy.
• Share information with the public as soon as you can, lawfully.
• Be clear on what is inside information in your possession, and know what you may and may not share. If in doubt, don’t.
• Do not disclose information which isn’t in the public domain to outsiders.
• Remove yourself from conversations regarding inside information or related topics and take greater care at social events and informal meetings.
• Don’t recommend actions to others regarding dealings using inside information. 
• Keep an eye out for suspicious trades and those which don’t fit the usual buy pattern.

The main route to compliance is to keep an accurate list of everyone who has inside information – an insider list. Under MAR, these lists must be maintained in a prescribed way e.g. every list must be time-stamped according to the UTC time zone and must be kept in a digital format, together with previous versions, detailing as many as four different phone numbers for each insider. The competent authority can request your insider list at any time.

Moreover, according to Article 18(2) of MAR, all people on your insider list must be notified that they have been included and confirm that they have understood their obligations.

So, you are required to keep your insider lists in a digital format and you must send notifications to insiders as soon as you include them. It’s natural to wonder,

“What kind of software can I use for insider lists?”

Some companies use spreadsheet programs for this purpose but this can be very risky for a number of reasons, namely:

• timestamps have to be entered manually which can easily result in human errors;
• document versions can be difficult to track because this means that, every time the spreadsheet is modified, it has to be saved with a different name; and
• manual insider notifications and reminders can be a burden to your administration and there is a high chance of someone forgetting to send a notification.

3.2 Unlawful disclosure

MAR Article 10 deals with unlawful disclosure. As its name implies, it is the sharing of insider information with an individual who does not have the need, or the right, to have access to that information. It involves unlawful disclosure of information which is not readily available and related to an investment or one or more issuers. It could, in their possession, be used to make a trading or investment decision. If used, it could be anticipated to affect the price.

3.2.1 How to ensure compliance regarding unlawful disclosure

Again, we can see how an insider list is valuable to authorities as it clearly documents the flow of information as well as who has access to what information. Two notable actions are frequently identified:

• Not to disclose information in a social context.
• Not to selectively brief analysts and, as such, attempt to discharge managerial responsibilities.

3.3 Misuse of information

This is a ‘catch-all’ set of behaviours, not covered under insider dealing or unlawful disclosure. Various articles, mostly within Chapter 2 of MAR, detail this.

As a term, misuse of information is a little harder to fully comprehend because its purpose is to clarify and complete the first two behaviours above. Section 1.5 of the FCA handbook explains it in detail:

“[This behaviour is] based on information which is not generally available to those using the auction platform but which, if available to a regular user of the auction platform, would be, or would be likely to be, regarded by him as relevant when deciding the terms on which transactions in qualifying investments should be effected, and is likely to be regarded by a regular user of the auction platform as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the auction platform.”

3.3.1 How to ensure compliance regarding misuse of information

Following the tips above for inside information and unlawful disclosure, including the use of an insider list, will go a long way to complying with this section of MAR. You should also avoid dealing based on information you could reasonably be expected not to disclose.

3.4 Manipulating transactions

Article 12 of MAR covers manipulating transactions. The behaviour of manipulating transactions relates to giving (or being likely to give) either misleading or false impressions regarding qualifying investments, such as relating to supply, demand or price. It also applies to securing “the price of one or more such investments at an abnormal or artificial level.” 

3.4.1 How to ensure compliance regarding manipulating transactions

There are multiple behaviours to avoid. These include:

• Selling or buying at the close of the market with the purpose of misleading those who will act on closing prices (unless done legitimately).
• Wash trades. Selling and buying the same financial instruments to create a false impression of activity in the marketplace. 
• Painting the tape. Trading securities in a manipulative way, e.g. buying a large number of stocks, in order to attract other investors and increase the price of a certain company’s shares.
• Using electronic trading systems to enter orders at higher prices than the previous bid, or lower than the previous offer, and then removing them before they are actioned, with the purpose of giving the impression of greater demand or supply than there actually is.

BaFin, the Federal Financial Supervisory Authority in Germany has some excellent guidance in this area, including concrete examples.

3.5. Manipulating devices

MAR Article 12 covers manipulating devices. Manipulative devices are ways of deceiving the market and effecting transactions in fictitious ways. In many ways, it is an extension of ‘manipulating transactions’. 

3.5.1 How to ensure compliance regarding manipulating devices

Do check out the FCA handbook, this time Section 1.7, for detailed information regarding the behaviours to avoid. BaFin, the Federal Finance Supervisory Authority in Germany has a report detailing some good examples of such unacceptable practices. Here are a few behaviours that would be considered manipulating devices:

• Using your access to media to voice an opinion about an investment when you’ve already taken steps, or placed bids, in relation to it, and thus benefiting from what you have done.
• Transactions, or a singular transaction, that are meant to hide your ownership of an investment, so that you can get around disclosure, with the intent of misleading.
• Pump and dump. Spreading misleading positive information, e.g. press releases, to artificially increase stock prices and sell shares for profit. When the operators of the scheme end it, the stock price usually goes down and other investors are affected. 
• Trash and cash. Spreading misleading negative information in order to reduce stock price and purchase shares at a lower cost.
  

3.6. Dissemination

MAR Article 12 covers dissemination. Dissemination refers to the behaviour of distributing or sharing (by any means) information that may result in the wrong or misleading impression of an investment. If it’s reasonable to conclude that you knew this information would mislead investors, you could be charged with market abuse. The Gibraltar Financial Services Commission has an excellent handbook which covers dissemination very clearly.

3.6.1 How to ensure compliance regarding dissemination

Once again, having clear records, via an insider list, of who has access to what insider information, will help to prevent dissemination. Behaviours that you should avoid are highlighted by Section 1.8 of the FCA MAR handbook as follows:

• Spreading, either intentionally or through lack of care, misleading or false information regarding an investment.
• Behaving in such a way that could reasonably be seen to give an impression which is misleading or false. 

3.7 Distortion and misleading behaviour

Last on our list is distortion and misleading behaviour. Again, this is a ‘catch-all’ term and is defined by Section 1.9 of the FCA handbook as follows:

“…(not amounting to market abuse (manipulating transactions), market abuse (manipulating devices), or market abuse (dissemination) is likely to give a regular user of the market a false impression as to the supply of, demand for or price or value of, qualifying investments; or would be or would be likely to be, regarded by a regular user of the market as behaviour that would distort, or would be likely to distort, the market in such as investment and is… likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market.”

There is no concrete article or section of MAR that covers distortion and misleading behaviour. Elements of it are sprinkled throughout the text of the regulation. 

3.7.1 How to ensure compliance regarding distortion and misleading behaviour

A couple of actions are given as examples of what constitutes distortion and misleading behaviour, which should not occur. These include moving commodity stocks to falsely affect the impression of a commodity, in terms of supply, demand, price or value. Another example of an action to avoid is moving an empty cargo ship, again with the purpose of creating a false impression regarding supply, demand, price or value.

4. Further information on compliance – market soundings

MAR establishes the behaviours which are unlawful regarding market abuse. However, it recognises that there are some instances where legitimate disclosure of inside information can be made, specifically through the process of market soundings. A market sounding is a way of gauging investor interest in advance of market action. This is covered in MAR Article 11.

That said, within the MAR marketing soundings, the regulation asserts record keeping and notification processes which must be done. 

5. What are the sanctions for failure to adhere to these seven behaviours?

MAR is an EU legislation drawn up by ESMA. However, each individual country is responsible for enforcing market abuse regulation sanctions in its own territory. You can find the relevant EU member states’ financial authorities here. MAR itself aims to facilitate cooperation across the EU to avoid inconsistencies and the opportunity for individuals to take advantage of border-related loopholes. Some countries in the EU do list reasonably clear and accessible information on MAR penalties, for example, the Commission de Surveillance du Secteur Financier in Luxembourg lists guidance by industry area.

ESMA has also published a report on the administrative and criminal sanctions under MAR each year which show aggregated sanctions by member state. In the EU, penalties predominantly take the form of fines which can run up to as much as €15m (or 15% of total annual turnover) for “legal” persons. The FCA in the UK can issue both fines and prison terms. They also use public censure – a formal way of ‘naming and shaming’ those who breach the terms of MAR. Within this are warnings and supervisory notices.

6. Market abuse cases and examples

There is a multitude of examples of action being brought under MAR. Here we showcase some: 

6.1 Swedish bank fined nearly €300,000

A well-known Swedish bank was fined nearly €300,000 by the Disciplinary Committee of Nasdaq in Stockholm. This was for failure to update an insider list, in a timely manner, regarding the bank’s CEO’s resignation.

6.2 Imprisonment and a £35,000 fine for insider dealing

A retired accountant was given inside information by a family friend to buy shares in a British IT management company. The friend was in possession of insider information concerning a possible takeover, as he was an employee of the company. The UK regulator imposed a £35,000 fine on the accountant. His friend was sentenced to 10 months in prison and ordered to pay a Confiscation Order of £23,000.

6.3 Compliance officer and day trader imprisoned for insider dealing

In June of 2019, a former compliance officer and a day trader were both sentenced to three years’ imprisonment under the insider dealing section of MAR. The day trader made close to £1.4m from the tips provided to him by the compliance officer via burner phones. 

6.4 Software company fined €198,981 for incorrect insider list

The Swedish regulator, Finansinspektionen (FI) fined a small software company €198,981. FI found that the organisation “did not comply with the requirements of Article 18 MAR, since the company did not keep a correct insider list.”

6.5 12 months of imprisonment for insider dealing

A former equity portfolio manager was sentenced to 18 months, reduced to 12 months, on two counts of insider dealing. He was also subject to a Confiscation Order in excess of £80,000. The man took advantage of his position at an investment firm in the UK and benefited from insider dealing on more than one occasion, before being investigated and found guilty. 

7. FAQs

7.1 What is the Market Abuse Regulation?

The Market Abuse Regulation (MAR) came into effect in July 2016. Its purpose was to expand on the preceding Market Abuse Directive (MAD) and improve the recognition and prosecution of market abuse throughout the EU. 

The core offences, such as insider dealing, remained the same, but MAR applies to a wider scope of behaviours, instruments and venues. Its overall goal is to increase integrity across the union.

7.2 Who can be prosecuted for market abuse?

Both individuals and organisations can be prosecuted for market abuse offences. Fines vary according to multiple factors. However, for individuals undertaking insider dealing, unlawful disclosure and market manipulation, the maximum EU fine is €5 million. Not all countries consider market abuse a criminal offence. Across the EU, prison terms vary between 2-4 years and, in the UK, individuals can be sentenced to up to 7 years. Companies can be fined up to €15 million, or 15% of annual turnover, for the same MAR offences. 

7.3 Is price positioning market abuse?

Yes. Price positioning is specifically listed as a form of market abuse in MAR. A summary can also be found under Section 1.6 of the FCA MAR handbook.

8. Conclusion

MAR is designed to bring clarity and consistency across the EU regarding market abuse. It’s also designed to elevate the integrity of the market, essential for it to be used with confidence for growth.

The seven behaviours that qualify as market abuse under MAR are distinct and incorporate more than the previous MAD. Understanding these seven areas of misconduct will help individuals and companies avoid the market abuse risks and the stringent penalties which can be imposed.

InsiderLog is designed to help companies save time and ensure compliance with MAR. If you want to try insider list management software created for this very purpose, you can request a free InsiderLog demo here. 

9. References and further readings

• MAR complete text from ESMA

• MAR: PDMR transactions and notifications
• FCA MAR handbook 
• ESМA final report on MAR guidelines 
• MAR explained
• FCA decisions 
• 5 ways to enable market abuse monitoring and reduce risk