Definition
Market abuse refers to a range of illicit activities that distort financial markets and erode investor confidence. These activities include:
- Insider Dealing: Trading in securities by individuals who have access to non-public, material information.
- Unlawful Disclosure of Insider Information: The sharing of inside information with individuals who then use it to their financial advantage.
- Market Manipulation: Practices aimed at deceiving investors by artificially manipulating market prices, spreads, or volumes.
The European Union’s Market Abuse Directive (2012) mandates that member states treat these activities as criminal offenses, with sanctions that are effective, proportionate, and dissuasive.
Examples
- Insider Trading: A senior executive purchases shares in his company before a major, undisclosed merger is announced, anticipating a rise in the share price once the public learns the news.
- Unlawful Disclosure: An employee leaks confidential earnings information to a friend, who then trades the company’s stocks based on that information.
- Market Manipulation: Coordinated trades by a group to create false impressions about a stock’s liquidity, inducing other investors to buy or sell based on misleading data.
Frequently Asked Questions (FAQs)
What is the EU Market Abuse Directive?
The Market Abuse Directive is a legislative act by the European Union that obliges all member states to criminalize certain practices that can harm the integrity of financial markets. Adopted in 2012, it addresses insider dealing, unlawful disclosure of insider information, and market manipulation.
Why was the Market Abuse Directive enacted?
The Directive was partly a response to the scandal surrounding the manipulation of the London InterBank Offered Rate (LIBOR) in 2012, which had significant implications for global financial markets.
What are the penalties for market abuse?
Penalties for market abuse can include substantial fines, imprisonment, and disqualification from serving as a director of a company. The sanctions are meant to be effective, proportionate, and dissuasive to prevent such activities.
How does market abuse affect investors?
Market abuse undermines the integrity of financial markets. If investors believe that markets are not fair and transparent, they are less likely to invest, which can reduce liquidity and increase the cost of capital.
Is market abuse only a European issue?
No, market abuse is a global concern. Many countries have regulations and laws designed to combat market abuse, such as the United States’ Securities Exchange Act of 1934, which established the SEC.
Related Terms with Definitions
- Insider Trading: The trading of a public company’s stock or other securities by individuals with access to non-public information about the company.
- Regulation NMS: A regulation promulgated by the SEC in 2005 to modernize and strengthen the National Market System for equity securities.
- London InterBank Offered Rate (LIBOR): A benchmark rate that banks charge each other for short-term loans, which became infamous due to manipulation scandals.
- Securities and Exchange Commission (SEC): The U.S. federal agency responsible for enforcing federal securities laws and regulating the securities industry.
Online References
- European Securities and Markets Authority (ESMA): Link to ESMA website
- Securities and Exchange Commission (SEC): Link to SEC website
- Financial Conduct Authority (FCA): Link to FCA website
Suggested Books for Further Studies
- “Market Abuse Regulation: Law, Policy, and Practice” by Marco Ventoruzzo
- “Insider Trading and Market Manipulation: Investigating and Prosecuting Across Borders” by Janet Austin
- “Market Abuse and Insider Dealing: Developments and Enforcement in the UK and EU” by Paul Davies
Accounting Basics: “Market Abuse” Fundamentals Quiz
Keep exploring the ever-evolving landscape of financial regulations and enhance your understanding of market integrity and investor protection through continuous learning and practice!
