Wash trades prohibited as market manipulation
The Financial Supervisory Authority (FIN-FSA) wishes to draw the attention of traders to the types of transactions that may be wash trades and meet the identifying characteristics of market manipulation. Surveillance of wash trades is one of the priorities of the FIN-FSA’s market abuse supervision in 2023.
What is a wash trade?
A wash trade refers to, for example, a situation in which a trader trades with themselves at a trading venue, such as the Helsinki Stock Exchange. In such cases, the buy and sell orders placed by the trader are executed at the trading venue as a trade, either in whole or in part. In addition, a wash trade refers to a situation in which the same person is the investment decision-maker on both the buying and selling sides of the executed trade. Thus, for example, situations in which a person makes the investment decision in a trade on behalf of both themselves and a company they own, or on behalf of a family member by power of attorney, may be wash trades.
Regulation of wash trades
The purpose of the regulation of market manipulation is to promote market transparency and strengthen investors’ confidence in the securities markets and the parties operating in them, as well as to ensure that market participants can act on the same terms and based on the same information. Market manipulation is defined in Article 12 of the Market Abuse Regulation (EU No 596/2014) and prohibited in Article 15.
Market manipulation means, among other things, placing trades or orders that give, or are likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument. Annex I of the Market Abuse Regulation lists a number of illustrative indicators to be taken into account when assessing whether trading is misleading.1
Misleading nature of wash trades
The misleading nature of wash trades arises from the fact that other market participants assume that the trades are between two unrelated parties who have made their investment decisions separately. In wash trades, this has not actually happened. Market participants must be able to trust that the information available from the market and the trades executed there are true and genuine.
Wash trades artificially increase the trading volume of a financial instrument, creating a misleading picture of supply and demand, which is particularly evident with thinly traded financial instruments. Wash trades may also affect the price of a financial instrument, but price change is not a prerequisite for the identifying characteristics of market manipulation to be met.
Care must be taken when placing orders
The FIN-FSA emphasises that Market Abuse Regulation’s prohibition on market manipulation applies to all entities operating in the securities market, irrespective of whether an entity operating professionally or a private individual engaged in investment activity is involved.
Before placing a buy or sell order, traders must always make sure that an order placed will not be even partially executed on the trading venue with another one of their orders. To avoid trading with themselves, traders should pay attention to their existing orders and exercise care when placing new orders, for example by taking into account the limit prices of orders.
The FIN-FSA reminds traders that they should primarily contact their own broker if they have any questions or doubts with regard to trading.
What may be the consequences of wash trades?
Supervision of securities market trading is extensive, involving not only the FIN-FSA but also, among others, trading venues and investment service providers that transmit and execute orders. Highly automated surveillance systems are comprehensively and effectively used in monitoring trading. Surveillance of wash trades is one of the priorities of the FIN-FSA’s market abuse supervision in 2023.
The FIN-FSA may impose an administrative penalty payment for wash trades or submit a request for investigation to the police. Market manipulation is punishable under the Penal Code. Attempted market manipulation is also punishable. The criminal penalty may be a fine or up to two years’ imprisonment or, in the case of aggravated market manipulation, up to four years’ imprisonment.
For further information, please contact:
- Juha Manu, Senior Supervisor, juha.manu(at)fiva.fi or tel. +358 9 183 5323
- Hermanni Teräväinen, Senior Supervisor, hermanni.teravainen(at)fiva.fi or tel. +358 9 183 5346
1 With regard to wash trades, particularly indicator c)
“whether transactions undertaken lead to no change in beneficial ownership of a financial instrument, a related spot commodity contract, or an auctioned product based on emission allowances;”
Annex II to Commission Delegated Regulation (EU) 2016/522 specifies indicator (c) of Annex I to the Market Abuse Regulation with, among other things, the following (point 3) a) practice
”Entering into arrangements for the sale or purchase of a financial instrument, a related spot commodity contract, or an auctioned product based on emission allowances, where there is no change in beneficial interests or market risk or where beneficial interest or market risk is transferred between parties who are acting in concert or collusion – usually known as ‘wash trades’.