Topic Market manipulation Market manipulation
Market abuse harms the integrity of financial markets and public confidence in their functioning. Market manipulation is a form of market abuse. In order to protect the financial markets, market manipulation is therefore prohibited. It is one of BaFin's main functions to detect and investigate cases of market manipulation.
Since 3 July 2016, Regulation (EU) No 596/2014 (Market Abuse Regulation – MAR) has been directly applicable in the member states of the European Union. Its objective is to create a consistent set of rules applicable throughout the EU for the protection of market integrity. Alongside this, the EU issued Directive 2014/57/EU (Market Abuse Directive – CRIM-MAD), which serves to harmonise criminal law in this area. This directive was transposed into German law through the First Act Amending Financial Markets Regulations (Erstes Finanzmarktnovellierungsgesetz – 1st FiMaNoG). The previous regulation prohibiting market manipulation in section 20a of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) was rescinded. In addition, the WpHG was restructured and renumbered through the Second Act Amending Financial Markets Regulations (Zweites Finanzmarktnovellierungsgesetz – 2nd FiMaNoG).
The definition of market manipulation and the prohibition of market manipulation are now governed by the provisions of the MAR. Pursuant to Article 15 of the MAR, market manipulation and attempts at same are prohibited. Article 12 of the MAR defines which activities are covered by the term "market manipulation".
In accordance with this, it is prohibited to enter into a transaction, place an order to trade or behave in any other way that gives false or misleading signals as to the supply of, demand for, or price of a financial instrument. Annex I to the MAR contains a non-exhaustive list of indicators of manipulative behaviour. For instance, if transactions undertaken lead to no change in beneficial ownership of a financial instrument, this may indicate market manipulation in the form of wash sales. Pre-arranged trades, i.e. orders based on a prior agreement between the buyer and seller that are not disclosed beforehand, are also prohibited.
It is also prohibited to disseminate information that gives false or misleading signals with regard to the supply or the price of a financial instrument or that produces an artificial price level. In addition, the MAR expressly prohibits the manipulation of benchmarks.
The prohibition of market manipulation applies, in particular, to all financial instruments traded on a regulated market or on a multilateral or organised trading facility. In addition to securities (such as shares and bonds), this includes money market instruments or derivative transactions and spot commodity contracts, provided these depend on the price or the value of a financial instrument or can affect this. The prohibition also expressly applies to commodities traded on a domestic market and foreign currencies.
In order to detect cases of market manipulation, BaFin analyses transaction and order data, carries out research and observes the market. It evaluates suspicious transaction and order reports submitted by institutions and follows up on information received from the trading surveillance units of the stock exchanges, law enforcement agencies and investors. Information is also received from market operators and investment services enterprises that operate trading venues. Pursuant to the provisions of the MAR, these operators are obliged to prevent and detect market abuse. Market participants who professionally arrange or execute transactions relating to financial instruments are also required to have systems in place to detect and report infringements.
The provisions governing criminal penalties and administrative fines in cases of market manipulation are stipulated in the Securities Trading Act (Wertpapierhandelsgesetz –WpHG). Anyone who wilfully or negligently commits market manipulation is deemed to have committed an administrative offence (section 120 (15) of the WpHG). Market manipulation constituting an administrative offence will be investigated by BaFin and sanctioned with an administrative fine. The amount of the administrative fine depends on the type of market manipulation committed and can amount to up to EUR 5 million for individuals and up to EUR 15 million or 15% of total turnover for legal persons. In addition, the administrative offence may be punished with a fine of up to three times the economic advantage gained from committing the offence.
Instances of deliberate manipulation influencing the stock exchange or market price are criminal offences punishable by a term of imprisonment of up to five years or a fine (section 119 (1) no. 1 of the WpHG). If the perpetrator acts on a commercial basis or as a member of a criminal organisation or in execution of a work-related activity, e.g. for an investment services enterprise, market manipulation will be punished as a criminal offence by a term of imprisonment of between one and ten years. Attempted market manipulation is also a punishable offence (section 119 (5) of the WpHG).
Decisions on measures and sanctions taken because of a violation of the prohibition of market manipulation are published on BaFin's website ("naming and shaming", regulated under section 125 of the WpHG).