UK tribunal upholds $12.8 million Swift Trade FSA fine

The decision concludes an appeal that began in June 2011, after the FSA told the firm that it found it had committed market abuse and intended to fine it £8 million; its largest monetary sanction for market manipulation.

The FSA had found that, between January 2007 and January 2008, Swift Trade engaged in a systematic and deliberate form of manipulative trading known as ‘layering’, which caused a succession of small price movements in a wide range of individual shares on the London Stock Exchange (LSE) from which Swift Trade made substantial profits. It notes that the trading was widespread and repetitive.; which, it believes, if unchecked, could undermine market confidence.

According to the Tribunal decision, the firm argued that the FSA did not have jurisdiction; that the trades in question were in derivatives not securities, and that they were not undertaken by Swift Trade but by traders using its direct market access platform; that the trading was not manipulative, but legitimate high volume day trading, that was transparent to the market, did not lead to a loss by any investor, and were not abusive; and, that Swift Trade had no reason to think that what was being done was improper.

Additionally, it argued that its conduct was investigated in Canada by the Ontario Securities Commission (OSC), and it reached a negotiated settlement with the OSC, which must be respected by the FSA. “The Authority’s actions were inappropriate in the light of that settlement, and the decision notice should be set aside,” it says the firm argued.

However, the tribunal rejected those arguments and sided with the FSA. It concluded that the trading in question, “… was deliberate, manipulative, designed to deceive other market users, successful in that aim, and undertaken for motives of profit. The repetition was too frequent, and the patterns too similar, for the appearances to be attributable to coincidence or some other chance event, and we have no doubt it was the product of a directing mind.”

It also found that the firm knew the trading was abusive. “There is no evidence before us from which we could draw the conclusion that Swift Trade had, or could reasonably have thought it had, grounds for believing that its conduct was not abusive; on the contrary, the evidence points very much to the conclusion that its officers and managers knew very well that its conduct was not legitimate and that, far from taking steps to prevent such conduct, they actively encouraged it,” it says.

The tribunal also rejected the firm’s argument that the FSA should respect the settlement with the OSC. “… while it is true that there is no finding by the OSC that Swift Trade directed the dealers or engaged in manipulative strategies of the kind alleged by the Authority in these proceedings, it is equally the case that there is no finding that Swift Trade had not engaged in such practices: in other words, the settlement agreement is silent on the point,” it says, noting that the “OSC was not looking into Swift Trade’s trading practices, but into its compliance procedures… we find nothing in the settlement agreement or in any other aspect of the OSC enquiry which should preclude the Authority’s, or our, examining Swift Trade’s activities on United Kingdom markets.”

Ultimately, it found the FSA’s proposed £8 million was justified, noting, “… it is as serious a case as might be imagined, and there is nothing which could possibly be said by way of mitigation.”

Tracey McDermott, FSA director of enforcement and financial crime said, “We are pleased that the Tribunal has upheld the FSA’s decision and accepted unreservedly the evidence from our witnesses and experts as to the nature and impact of the activity. This was a particularly cynical case where a business model was based on market abuse. The approach taken by Swift Trade was novel and complex, designed to allow them to benefit at the expense of other market users, and to make detection more difficult. The FSA is committed to taking whatever steps are necessary to protect the integrity of our markets whatever the techniques used and wherever the perpetrators are located.”

“We urge other market participants to take note of this judgment which makes it clear that layering is abusive. We expect brokers and DMA providers to ensure that their clients implement appropriate controls to monitor their clients’ trading activity closely to ensure that it is not abusive, and to report suspicious transactions,” adds McDermott.