Share traders routinely fiddle prices at the end of each day’s trading to boost bonuses and profits, influential MPs claimed yesterday, demanding a full probe from the City watchdog.
The probe could set the scene for a scandal far larger than Libor manipulation, as stocks are held widely by the general public and in pension schemes, rather than a financial benchmark that was until recently little known outside the sector.
The Financial Conduct Authority (FCA) is understood to be considering launching a probe into the market.
Traders frequently manipulate share prices by placing larger orders at the end of the day to boost or depress prices in a way which benefits their overall positions, Mark Garnier MP said at a Treasury Select Committee hearing.
This could be by storing up orders placed by clients earlier in the day, or with proprietary funds.
They could benefit either directly from the price change, or through derivatives based on the price.
Typically this happens in small- and mid-cap firms, or in niche indices, where trading volumes are low and so prices can be moved by large orders, rather than in the most liquid stocks such as those in the FTSE 100.
And depending on the timing of such manipulation, it could help traders hit monthly or quarterly targets, boosting their bonuses.
“Libor fixing was merely scratching the surface. It has opened a Pandora’s box and it is clear that wherever there is a benchmark there is an opportunity to manipulate it,” Garnier, a veteran of 27 years working in investment banks and hedge funds, told City A.M.
“You can look at this in a sinister way, where traders potentially have derivatives contracts against an index. It would be impossible for one to manipulate the FTSE 100, but there would be a greater opportunity to manipulate mid-cap stocks or a niche index, say one in high tech stocks.”
He called for an FCA investigation into the market.
And he was joined by Andrew Tyrie MP, chairman of the Treasury Select Committee.
“We are all amazed equity closing prices have not been looked at at all,” he said in parliament yesterday.
The Financial Conduct Authority and its predecessor the Financial Services Authority have taken action in some cases similar to these, including famous market abuse by the so-called Flaming Ferraris group in 1999.
And it is understood an investigation into the wider market could take place in the coming months.
One opportunity for a thorough probe would be the fair and efficient markets review announced by the chancellor this month. It will be led by Minouche Shafik, the new deputy governor of the Bank of England.
Another option would be to include such an investigation in the FCA’s review of competition in wholesale markets.
It is consulting on the scope of that review in the coming months, and the MPs could push for equity market manipulation to be investigated there.
The FCA declined to comment.