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FSA finds no evidence of market manipulation behind HBOS share price slump

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The Financial Services Authority has announced that its investigation into trading in the stock of mortgage bank HBOS following a sharp fall in its share price has failed to uncover eviden

The Financial Services Authority has announced that its investigation into trading in the stock of mortgage bank HBOS following a sharp fall in its share price has failed to uncover evidence that the bank was the deliberate target of false rumours designed to depress its share price and benefit investors who had sold its stock short.

However, the UK financial regulator says it is examining how firms that trade in the markets deal with rumours and has warned traders such as investment banks and hedge fund managers that it will continue to investigate any possibility of market manipulation, if necessary demanding access to individuals and communication records.

The events that prompted the FSA’s investigation followed the collapse of confidence in US investment bank Bear Stearns and its emergency sale to JP Morgan on Sunday, March 17. The following week rumours circulated in the London market that a UK bank was facing funding difficulties.

Several of the rumours identified HBOS by name, suggesting that the governor of the Bank of England had cancelled Easter travel plans to resolve a liquidity problem at the bank or that the Bank of England was ‘bailing out’ HBOS.

As these rumours circulated, the HBOS share price fell by 17 per cent in the first 52 minutes of trading on Wednesday, March 19, despite a temporary suspension of trading, before partly recovering to end the day down by 7 per cent from the previous close.

According to the FSA, a number of market commentators speculated at the time that the fall in the HBOS share price was the result of unscrupulous traders who spread false rumours through e-mails and messages to profit from having earlier sold the shares short.

The regulator immediately launched an investigation into trading in HBOS shares and the dissemination of news and speculation about the bank to determine whether anyone might have spread misleading, false or deceptive information in order to profit from a fall in the HBOS share price.

‘During the course of the investigation, FSA staff interviewed market participants at investment banks, broker dealers and hedge funds, including traders, senior management and compliance staff,’ the regulator says.

‘Our market monitoring team reconstructed segments of the order book, scrutinised trading records relating to HBOS shares and derivative instruments, analysed market transaction data for all HBOS instruments including OTC derivative instruments through our centralised transaction monitoring database and reviewed e-mails and messages – including taking steps to verify any specific e-mails and messages highlighted by market commentators. We also looked at message boards and reconstructed global press coverage of HBOS during the relevant period.’

The FSA says there is no doubt that false and damaging rumours were circulating about HBOS on March 19 and that these would have had some impact on its share price, but it adds: ‘It is difficult, however, to say how much impact, as the share price was also affected by the interaction of other complex factors, including a lack of liquidity in the order book with parties unwilling to enter buy or sell orders, particularly after the automated trading halt, and the effect of algorithmic trading strategies, which amplified the impact of the initial downward trend in the HBOS share price.

‘Despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price.’

Nevertheless, the UK regulator says it will continue to monitor the market for any evidence of manipulation and will if necessary demand immediate access to traders, information and trading strategies as well as to e-mail, messaging and telephone records.

‘Where there is evidence of market abuse then we will take enforcement – including criminal – action,’ the FSA says. ‘We are also following up the wider issues which the HBOS rumour case has highlighted [and the] markets division has launched a review of the systems and controls at firms for dealing with rumours.

‘Specifically, we are examining what policies are in place and how firms ensure compliance with them; whether and how rumours are verified; whether traders are permitted to pass on or trade on rumours; and how firms ensure staff do not initiate or spread false rumours. This exercise is covering a range of investment banks, securities firms and hedge fund managers.’

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