Julia Hoggett, director of market oversight at the UK’s FCA, has a simple adage: you maximize the chances of people meeting your expectations if you are clear about what those are.
Julia Hoggett, FCA
In a speech late last year, she set out what she expects of market participants when it comes to the identification and reporting of market abuse, in whatever form.
Equity market participants needed to step up their ability to identify market manipulation – often less obvious than insider dealing and accounting for a much lower proportion of reports.
And fixed income and commodity markets needed to get better overall at identifying all kinds of market abuse.
Hoggett, a former fixed income banker, noted at the time that equity insider dealing accounts for the majority of suspicious transactions and orders that are reported to the regulator by market participants.
Data for the second half of 2016 – data for 2017 should be available by the end of February – put the number at 70%.
A few months on, Hoggett is elaborating to Euromoney about how she sees the regulator’s role. She sees the messages she outlined in her speech as the beginning of a more nuanced dialogue with the market about the ways in which her institution’s work on market abuse will take place.
“As a regulator, we need to lay out a clear rationale as to why market abuse has such an impact and why there is harm from it to the wider public,” she says. “We need to focus on the skills and capabilities market participants need to develop to prevent it from happening, what our role is in preventing it and what role we think market participants should play.”
It’s an all-encompassing task, and it’s one that often involves guiding market participants to a different outcome or a change in attitude rather than simply beating them with the stick of the rulebook.
“Sometimes you need to lay out some simple, first-principle messages, because it enables people who are operating in regulated markets to take a step back and say: ‘I know this rule exists but what is it there to do?’”
It can also be about ensuring that people know what is covered by a rule such as the market abuse regulation – that it is not just about insider trading but also covers areas such as delayed disclosure and misleading statements; areas to which the FCA dedicates specific resources.
Good and bad
The high-profile cases of trader bad behaviour that crop up periodically when a body such as the FCA or the US Department of Justice gets to post lurid transcripts online suggest that there is still plenty to be done.
For her part, Hoggett divides the world that she is helping to regulate into two classes.
“There are those that want to do the right thing and are making every effort to do the right thing, but don’t necessarily know what the right thing is or don’t succeed in doing it all the time,” she says.
For this category of participant, a great deal of a regulator’s work is on what Hoggett calls “course correction”. Serious breaches might well happen from time to time, but there is a sense of working with people who want to get it right.
That’s one group, but there’s another.
“At the other end, you may come across individuals who are seeking to benefit from their activity in a market with very little regard for the rules and making material efforts to try to evade them.”
There’s little mystery to this, of course – all the algorithmic trading in the world doesn’t prevent financial markets from reflecting human nature. “I don’t view markets as very different to societies,” Hoggett adds.
Getting regulation right means addressing each of those categories in appropriate ways, and Hoggett doesn’t see the role of a regulator as simply waiting for people to slip up. The way she describes her mission makes it sound more like a partnership.
“Sometimes firms may have not built a surveillance system that works as well as it could or should, or sometimes they may not have factored a certain type of behaviour into their monitoring,” she notes.
“The FCA can play a role in providing feedback to firms to support the enhancement of their monitoring.”
Harder to spot
Writing last year about Hoggett’s speech, Euromoney speculated on reasons why the fixed income market typically sees far fewer reported instances of market abuse than in equities. After all, at least part of Hoggett’s message at the time seemed squarely aimed at those parts of the market that look under-represented in market abuse statistics.
Her parting shot at the end of the speech left little doubt about that: “If compliance with the market abuse regime is a state of mind, then the state of mind that market abuse only takes place in equities, which still feels like an unreconstructed assumption in certain areas of the market, needs to be thoroughly broken.”
So is fixed income still a shadowy world where the light of market abuse surveillance has not yet properly been shone, or is at least part of the explanation that there is simply less bad stuff going on?
The answer is a bit of both, and has a lot to do with the different dynamics of the asset classes – in equity markets up is generally good, down is bad; in fixed income things are not quite so transparent.
But also: “In the context of insider dealing, if you look at the instruments that are traded on financial markets, the one where material news about an institution is most likely to manifest itself in the greatest degree of price action is equity,” adds Hoggett.
That is not in itself about market abuse – it’s a fact of corporate finance. However, it’s also clear that you make more money cheating in equity than you do in fixed income.
This probably accounts for the dominance of equities in insider dealing cases, but with market manipulation the case is far less clear-cut.
“It’s harder to make that sort of distinction between the prevalence of it in one asset class over another,” says Hoggett.
Fixed income positions are murkier, and not because of anything particularly nefarious. Markets are less public and less transparent than in equity.
“There is no doubt that fixed income has a range of different hedging techniques that can leave the net position to be less clear than in many equity positions,” notes Hoggett. That makes it harder to monitor and harder to unpick.
Also, fixed income is arguably only now having its Big Bang moment – the introduction of Mifid II, a move that Hoggett describes in terms that perhaps only a regulator can truly appreciate: “The richness of the data that we are now receiving is causing a certain degree of excitement in the building.”