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Public Lectures in Law and Economics Bologna, May
9, 2003 Carmine Di Noia
Index of Presentation
  • SECTION 1 Introduction
  • SECTION 2 Insider Trading
  • SECTION 3 Manipulation
  • SECTION 4 Manipulation VS BBP Stabilisation
  • SECTION 5 Preventive Measures
  • SECTION 6 Competent Authority

Introduction 1
  • Market Abuse Directive timetable
  • 1989 Directive on insider trading (89/592)
  • 1999 Financial Services Action Plan
  • 2000 Lisbon Council, implementation of FSAP by
  • 2005 Wise Men Committee
  • 2001 Lamfalussy Report, 4 level approach
  • 2001 Commission proposal
  • 2002 Common position Cesr
  • 2003 Final Directive
  • 2004, October 12 deadline for implementation
    (include laws, regulations and administrative

Introduction 2
    Framework Directive (Commission
    proposal/Council-Parliament codecision) and
    definition of implementing powers for the
    CommissionLEVEL 2 Implementing Measures (CESR
    technical advice after consultation/Commission/Eur
    opean Securities Committee (majority vote)
    European Parliament kept fully informed, may
    adopt resolutions a) within 3 months on draft
    implementing measures b) within 1 month after
    vote of ESC if level 2 measures exceed
    implementing powers)LEVEL 3 Joint
    interpretation/Common (non binding) standards
    (CESR)LEVEL 4 Compliance/enforcement (Commission
    against Member States)

Introduction 3
  • CESR/Commission level 2 timetable
  • 2002, March. Commission 1st request to CESR for
    advice on implementing measures
  • 2002, April on. Expert-Consultative Working Group
  • 2002, July. CESR 1st Consultation paper
  • 2002, December. CESR final advice to the
  • 2003, January. Commission 2nd request to CESR for
    advice on implementing measures
  • 2003, March. Commission publishes draft
    directives (2) and regulation (1) on implementing
  • 2003, April CESR 2nd Consultation paper
    (Additional level 2 implementing measures)
  • 2003, May. Inter-Institutional Monitoring Group,
    First Report

Introduction 4
  • Reason for a new directive on market
    abuse(insider trading market manipulation)
  • NO existing directive on mkt manipulation (only
    on insider)
  • Great diversity at national level (rules and
  • New financial instruments and techniques
    increasing mkt manipulation
  • Need to protect market integrity to ensure
    integration of financial markets (other
    directives ISD, single prospectus, transparency,

Introduction 5
Measures to Promote Market Integrity
Price Discovery Process
Institutional investors
Mass - Media Financial journalists
Introduction 6
Market Integrity (2003/6/EC Directive)
  • An integrated and efficient financial market
    requires market integrity.
  • The smooth functioning of securities markets and
    public confidence in markets are prerequisites
    for economic growth and wealth.
  • Market abuse harms the integrity of financial
    markets and public confidence in securities and

Insider trading - Example
Manipulation Example
SECTION 2The 2003/6/EC DirectiveInsider
Insider trading 1.1
Definition of inside information Art. 1
  • "Inside information" shall mean information of a
    precise nature which has not been made public,
    relating, directly or indirectly, to one or more
    issuers of financial instruments or to one or
    more financial instruments and which, if it were
    made public, would be likely to have a
    significant effect on the prices of those
    financial instruments or on the price of related
    derivative financial instruments

Insider trading 1.2
Definition of inside information (more)
  • Member States should tackle the practice known as
    "front running", including "front running" in
    commodity derivatives, where it constitutes
    market abuse under the definitions contained in
    this Directive (whereas n. 19)
  • For persons charged with the execution of orders
    concerning financial instruments, "inside
    information" shall also mean information conveyed
    by a client and related to the client's pending
    orders. (Art.1, 1 3rd para.)

Insider trading 2 Level 2
European Commission asked advice on the meaning
Precise nature
Price sensitive
Insider trading 2.1
1) precise information (art. 2 draft directive)
Information of a precise nature shall mean any
information consisting of a matter or an event
which is true or could reasonably be expected to
become true in the future (remember relevant
definition also for issuers disclosure!)
True based on firm and objective evidence (as
opposed to Rumours) which are not are not inside
could become true uncertain but contingencies
dont mitigate precise of info (if expected
merger doesnt occur, this could be in any case
precise info).
Insider trading 2.2
1) precise information (art. 2 draft directive)
when this information is specific enough to
allow a conclusion to be drawn about its possible
impact on prices
The information should be price sensitive A piece
of info allow a conclusion Either when
enable a reasonable investor to take an
investment decision without (or at very low)
risk Or when it is likely to be exploited
immediately on the market
Insider trading 2.3
2) price sensitivity of information (art. 3 draft
Information which would be likely to have a
significant effect mean ex-ante available
information an average person would be likely to
use as part of the basis of his investment
decisions in order to optimise his interests
Insider trading 2.4
2) Price sensitivity
Market participants have to be able to assess
beforehand whether the information is price
sensitive, in order to be able to act
accordingly, regarding the duties of
confidentiality, prompt disclosure and
prohibition to enter into transactions. This
assessment has to take into consideration the
market impact, which would be foreseeable at the
moment when the information has not yet been
disclosed. Ex-ante factors have to be found in
order to guide market participants in their
decisions. Any (relevant) information available
at the time has to be taken into account. Other
variables would include prices, returns,
volatilities, liquidity, price relationships
among financial instruments, volume, supply,
demand, order book, timing of prices and news
disclosure, rules governing the exchange and
market microstructure, etc. A piece of
information could be considered as likely to have
a significant effect on prices of financial
instruments even though, when the piece of
information is published, this doesnt actually
produce any effect.
Insider trading 2.5
2) price sensitivity
Useful indicators Type of info is the same as
info which had in the past a significant effect
on prices Pre-existing analysts reports and
opinions indicate the that type of info is price
sensitive Issuers itself has treated similar
events as inside info List of price sensitive
information point 35 (Level 3)
Insider trading 3.1
Definition of insider trader (Primary insiders)
Art. 2
  • Any person who possesses an inside information
  •  (a) by virtue of his membership of the
    administrative, management or supervisory bodies
    of the issuer, or
  •  (b) by virtue of his holding in the capital of
    the issuer, or
  •  (c) by virtue of his having access to the
    information through the exercise of his
    employment, profession or duties, or
  •  (d) by virtue of his criminal activities.

Insider trading 3.2
Definition of insider trader (Secondary insiders
  • The prohibitions applicable to the Primary
    insiders should also apply to any person, who
    possesses inside information while that person
    knows, or ought to have known, that it is inside
    information (Art. 3).

Insider trading 3.3
  • Member States shall prohibit any person
    (primarysecondary insiders) . who possesses
    inside information from
  • using that information by acquiring or disposing
    of, or by trying to acquire or dispose of, for
    his own account or for the account of a third
    party, either directly or indirectly, financial
    instruments to which that information relates
  • disclosing inside information to any other person
    unless such disclosure is made in the normal
    course of the exercise of his employment,
    profession or duties (confidentiality duties)
  • recommending or inducing another person, on the
    basis of inside information, to acquire or
    dispose of financial instruments to which that
    information relates.

SECTION 3 The 2003/6/EC Directive MANIPULATION
Manipulation 1 Definition (Art. 1.2)
1. Transactions or orders to trade which give,
or are likely to give, false or misleading
signals as to the supply of, demand for or price
of financial instruments, or which secure, by a
person, or persons acting in collaboration, the
price of one or several financial instruments at
an abnormal or artificial level 2. Transactions
or orders to trade which employ fictitious
devices or any other form of deception or
contrivance 3. Dissemination of information
through the media, including the Internet, or by
any other means, which gives, or is likely to
give, false or misleading signals as to financial
instruments, including the dissemination of
rumours and false or misleading news, where the
person who made the dissemination knew, or ought
to have known, that the information was false or
Manipulation 1.1
Types of manipulation
  • trade based manipulation
  • information based manipulation
  • action based manipulation

Manipulation 1.2
Trade based manipulation -
  • In this case the manipulator tries to cause a
    price change in the price of a security by
    trading in themarket.
  • E.g. the manipulator through a series of
    purchases in the market tries to induce others to
    think that he is an insider and thus to follow
    him in buying the security in order to create a
    speculative bubble

Manipulation 1.3
Action based manipulation
  • In this case the manipulator tries to cause a
  • change in the price of a security through
  • that give the appearance of an active market
  • such security
  • Examples
  • wash sales (transactions involving no change in
    the beneficial ownership of the security)
  • matched trades (the buyer and seller have
    previously agreed to cancel the effects of the
  • In both the examples the manipulator is bearing
    no risk.

Manipulation 1.4
Information based manipulation
  • In this case the manipulator tries to cause a
  • change in the price of a security by spreading
  • false, exaggerated or misleading information.
  • Internet is the ideal way to implement such
  • strategy

Manipulation 2
CESR approach
Signals to be taken into account for possibly
manipulative behaviours (art. 8 of draft
Level 2
  • Rules related to
  • market microstructure
  • market liquidity
  • diagnostic flags indications which should draw
    further scrutiny and are likely to be present
    individually or cumulatively as signals of
    manipulative behaviour

Level 3
Manipulation 2.1
  • Orders which produce false signals

2) Orders which secure the price at an abnormal
or artificial level
  • Factors offering a strong indication
  • The extent to which orders given or transactions
    undertaken represent a significant proportion of
    the daily volume of transactions in a financial
    instrument, in particular when these activities
    lead to a significant change in the price of the
    financial instrument.
  • The extent to which orders given or transactions
    undertaken by persons with a significant position
    (long or short) in a financial instrument lead to
    significant changes in the price of the financial
    instrument or related derivative or underlying

Manipulation 2.2
  • Orders which produce false signals

2) Orders which secure the price at an abnormal
or artificial level
  • Factors offering a strong indication
  • Whether orders given or transactions undertaken
    lead to no change in beneficial ownership of the
    financial instrument or which reallocate holdings
    among associated companies within a corporate
  • The extent to which orders given or transactions
    undertaken include position reversals in a short
    period and represent a significant proportion of
    the daily volume, and/or are associated with
    significant changes in the price of a financial
  • The extent to which orders given or transactions
    undertaken are concentrated within a short time
    span in the trading session and lead to a price
    change which is subsequently reversed.

Manipulation 2.3
  • Orders which produce false signals

2) Orders which secure the price at an abnormal
or artificial level
  • Factors offering a strong indication
  • The extent to which orders given change the
    representation of best bid or offer prices in a
    financial instrument, or more generally the
    representation of the order book available to
    market participants, and are removed before they
    are executed.
  • Whether the systematic purchase or sale of a
    financial instrument affects its price, without
    symmetric price impact by simultaneous
    counteracting transactions on other markets.
  • The extent to which transactions when undertaken
    at or around a specific time when reference
    prices, settlement prices and valuations are
    calculated lead to price changes which have an
    effect on such prices and valuations..

Manipulation 2.4
3) Orders which employ fictitious devices or any
other form of deception or contrivance
  • Factors offering a strong indication
  • Whether orders to trade given or transactions
    undertaken are preceded or followed by
    dissemination of false or misleading disclosure
    by the same or or associated persons.
  • Whether orders to trade might be given or
    transactions undertaken by persons, and
    associated persons, before or after they produce
    or disseminate research or investment
    recommendations which are erroneous or biased and
    demonstrably influenced by material interest

Manipulation The Grey Area
  • Journalists (art. 1.2.c)
  • in respect of journalists when they act in their
    professional capacity such dissemination of
    information is to be assessed,.., taking into
    account the rules governing their profession,
    unless those persons derive, directly or
    indirectly, an advantage or profits from the
    dissemination of the information in question.
  • Discretion to Member States for self-regulation

SECTION 4Manipulation vs. Buy Back Program
Price Stabilisation
Manipulation vs. Buy Back Program
(Art. 8) The prohibitions provided for in this
Directive shall not apply to trading in own
shares in buy-back programmes or to the
stabilisation of financial instrument provided
such trading is carried out in accordance with
implementing measures adopted pursuant to the
procedure referred to in Article 17(2)
Insider trading
Safe harbour (i.e. Exemption)
Market Manipulation
Manipulation vs. Buy Back Program
CESR/Commission Approach
Allow BBP without jeopardise market integrity
BBP identification
BBP disclosure
Main issues
Potential for Market Abuse
Fair treatment of shareholders
Allow flexibilities
Manipulation vs. Buy Back Program
BBP identificaton
  • The safe harbour covers
  • (1) the buying back of shares for the purposes of
    reducing the capital of an issuer
  • (2) the buying back of shares to meet obligations
    arising from debt financial instruments
    exchangeable into equity instruments
  • (3) fulfilling obligations arising from employee
    share option programmes and other allocations of
    shares to employees.

Manipulation vs. Buy Back Program
BBP ex-ante disclosure
  • Prior to the start of trading, full details of
    the programme must be published through an
    officially appointed mechanism in the
    jurisdictions in which an issuer has requested
    that its shares be admitted to trading on a
    regulated market. () All subsequent changes to
    the programme must be published through the same
    officially appointed mechanism(s).
  • The issuer must have in place the mechanisms
    necessary to ensure that it is able to fulfil
    trade reporting obligations to the relevant
    competent authority and/or market.

Manipulation vs. Buy Back Program
Conditions for trading (art. 3 draft regulation)
  • When executing trades under the programme, an
  • shall not purchase shares at a price higher than
    either the price of the last independent trade or
    the current independent bid
  • may not purchase more than 25 of the average
    daily volume of the shares in any one day on the
    regulated market.
  • however, in case of extreme low liquidity, the
    issuer may deviate from the above mentioned 25
    limit provided that the issuer a) informs in
    advance the Competent Authority b) disclose
    adequately its intention c) does not exceed 50
    of the average daily volume.

Manipulation VS. Stabilisation 1
  • Stabilisation mean to any purchase or offer to
    purchase Relevant Securities, or any transaction
    in Associated Securities equivalent thereto, by
    investment firms or credit institutions, which is
    undertaken in the context of a Significant
    Distribution of Relevant Securities (IPO or
    secondary public offering) for exclusively
    securing a market price for such Securities that
    would not otherwise prevail.
  • Activity that is not directly linked to this
    purpose will not benefit from the safe harbour.

Manipulation vs Stabilisation - Conditions 1
  • Stabilisation Period
  • Stabilisation shall be undertaken only during a
    defined period that has been disclosed to the
    market in advance.        
  • Stabilisation Price
  • Stabilisation may only be undertaken to support
    the market price of the Relevant Securities
    having due regard to prevailing market conditions
    and in any event may not be executed above the
    offering price.

Manipulation vs Stabilisation Conditions 2
  • Ex ante disclosure
  • The possibility of Stabilisation, together with
    adequate disclosure of the risks and other
    aspects of Stabilisation which could be material
    to an investors decision to subscribe for or
    purchase the Relevant Securities, must be
  • The existence and maximum size of any
    Overallotment Facility or Greenshoe, the exercise
    period of the Greenshoe and any conditions for
    the use of the Overallotment Facility or exercise
    of the Greenshoe must also be disclosed, as well

Manipulation vs. Stabilisation Conditions 3
  • Post Stabilisation Disclosure
  • Within one week after the end of the
    Stabilisation Period, the Stabilisation
    transactions undertaken must be adequately
    disclosed to the public. This disclosure has to
    contain the following information
  • the date at which the Stabilisation period
  • whether or not Stabilisation was undertaken
  • the price range between which Stabilisation was
  •  the date at which Stabilisation last occurred.

Manipulation vs Stabilisation Conditions 4
  • 1. Record keeping
  • Systems must be in place to record Stabilisation
    orders and transactions.
  • 2. The stabilisation manager
  • One Investment Firm shall act as central point of
    inquiry for any regulatory intervention.

SEZIONE 5Preventive Measure
Preventive Measures
Prevention of insider trading
  • The protection of investors requires that

they will be protected against the improper use
of inside information they are supplied with
appropriate, regular information form the issuers
of listed securities to ensure that they are
placed on equal footing and remove information
Preventive Measures Issuers Disclosure NEW!
  • Member States shall ensure that issuers of
    financial instruments inform the public as soon
    as possible of inside information which directly
    concerns the said issuers (art. 6) MISTAKE?
  • Only for admission on request (art. 9)
  • An issuer may under his own responsibility delay
    the public disclosure of inside information, such
    as not to prejudice his legitimate interests
    provided that such omission would not be likely
    to mislead the public and provided that the
    issuer is able to ensure the confidentiality of
    that information. (Additional requirement inform
    competent authority without delay).

Preventive Measures Issuers Disclosure
  • Possible legitimate interests for issuers to
    delay public disclosure (art. 6 draft directive)
    (but dont avoid risks!)
  • (1) Matters in course of negotiation, when public
    disclosure would be likely to affect the
    conclusion of a deal or the normal course of
  • (2) Decisions taken or contracts made by the
    management board of an issuer which need the
    approval of the supervisory board in order to
    become effective, where the organisation of such
    an issuer requires the separation between these
    boards, provided that such a public disclosure
    before the approval would jeopardise the correct
    assessment of the information by the public.

Preventive Measures Research (art. 6.5)
  • Member States shall ensure that there is
    appropriate regulation in place to ensure that
    persons who produce or disseminate research
    concerning financial instruments or issuers of
    financial instruments (including recommending or
    suggesting investment strategy), intended for
    distribution channels or for the public, take
    reasonable care to ensure that
  • such information is fairly presented, and
  • disclose their interests or indicate conflicts of
    interest concerning the financial instruments to
    which that information relates.
  • (Lack of) Coordination with ISD ancillary

Preventive Measures Research Level 2
  • Research and other information recommending or
    suggesting investment strategy shall mean
  • information produced by an independent analyst,
    an investment firm, a credit institution, a
    rating agency or an individual employed by them
    that, directly or indirectly, expresses an
    investment recommendation on a financial
    instrument or an issuer of financial instruments,
    as well as
  • information produced by others than the persons
    referred to above which directly recommends an
    investment decision on a financial instrument.

Preventive Measures Research Level 2
  • Standard for presentation of the recommendations
  • All Relevant Persons - other than those financial
    journalists who are subject to an appropriate and
    equivalent self regulatory regime - should take
    reasonable care to ensure that
  • facts are clearly distinguished from
    interpretations, estimates, opinions and other
    types of non-factual information
  • all sources are reliable or that, where a source
    is not considered reliable, this is clearly
  • all projections, forecasts and price targets are
    clearly labeled as such and the material
    assumptions made in using them are indicated.

Preventive Measures Research Level 2
  • Specific Rules
  • Investment firms, credit institutions and credit
    rating agencies should take reasonable care to
    ensure that
  • all substantially material sources are indicated
  • any basis of valuation or methodology used to
    evaluate an issuer or financial instrument is
    adequately summarised
  • the meaning of any rating category assigned
    (, sell etc) or recommendation (e.g.
    buy/hold/sell) made, is adequately explained and
    any appropriate risk warning indicated
  • reference is made to the planned frequency, if
    any, of updates of the Relevant Information and
    to any major changes in the coverage policy
    previously announced (e.g. a decision to stop
  • the date at which the Relevant Information was
    first released for distribution is indicated
    clearly and prominently, as well as the relevant
    date and time for any financial instrument price
  • the most recent change in recommendation or
    rating issued, if such change occurred over the
    previous twelve months, is indicated clearly and

Preventive Measures
  • Other preventive measures
  • the creation of insiders lists",
  • the application of "window trading" to sensitive
    categories of personnel,
  • the application of internal codes of conduct and
  • the establishment of "Chinese walls".

Implementing Measures
Preventive Measures
Insiders lists The directive requires all
issuers and third parties acting on their behalf
or for their account with access to inside
information to draw up lists of insiders. CESR
proposes that those concerned should maintain
lists of persons with access to inside
information together with permanent lists of
those who have regular access to inside
information. These lists should be updated on a
continuous basis to ensure that they are always
current Disclosure of (all) transactions The
directive requires those in managerial positions
within an issuer to disclose dealings in the
shares of the issuer. CESR proposes that this
obligation should cover members of the
administrative, management or supervisory boards
of the issuer together with senior managers
having similar decision making capacity within
the issuers.
Preventive Measures
Notification of suspicious transactions The
directive requires intermediaries to notify the
competent authority of transactions that they
suspect of being abusive. CESR proposes that
notification should occur once suspicions are
aroused. These persons need not have any
evidence. The notification obligation has to be
fulfilled if the person professionally arranging
transactions has sufficient indications that the
transaction might be abusive.
Preventive Measures
  • Other measures
  • A primary role in the prevention of insider
    trading is played by the existence of rules
    imposing a clear segregation of functions within
    investment firms (i.e. Chinese walls)
  • Chinese walls within firms helps
  • to ensure that privileged information will not
    flow or be disseminated to other departments or
    divisions engaging in other activities of
    projects, and
  • To avoid that people working for the other parts
    of the firm be considered as holding privileged
    information and, as such, be hampered or crippled
    in their activities.

SECTION 6 The Competent Authority
The Competent Authority 1 (art. 11)
  • Without prejudice to the competences of the
    judicial authorities, each Member State shall
    designate a single administrative authority
    competent to ensure that the provisions adopted
    pursuant to this Directive are applied.
  • Member States shall establish effective
    consultative arrangements and procedures with
    market participants concerning possible changes
    in national legislation. These arrangements may
    include consultative committees within each
    competent authority, the membership of which
    should reflect as far as possible the diversity
    of market participants, be they issuers,
    providers of financial services or consumers.

The Competent Authority 2
  • Appropriate administrative measures (without
    prejudice to criminal sanctions) effective,
    proportionate and dissuasive (art. 14).
  • The competent authority shall be given all
    supervisory and investigatory powers that are
    necessary for the exercise of its functions. It
    shall exercise such powers
  •  (a) directly or
  •  (b) in collaboration with other authorities or
    with the market undertakings, or
  •  (c) under its responsibility by delegation to
    such authorities or to the market undertakings,
  •  (d) by application to the competent judicial
    authorities (art. 12).

The Competent Authority 3
  • The powers of the Competent Authority should
    include at least the right to
  • have access to any document in any form
    whatsoever, and to receive a copy of it
  • demand information from any person, including
    those who are successively involved in the
    transmission of orders or conduct of the
    operations concerned, as well as their
    principals, and if necessary, to summon and hear
    any such person
  • carry out on-site inspections
  • require existing telephone and existing data
    traffic records
  • require the cessation of any practice that is
    contrary to the provisions adopted in the
    implementation of this Directive
  • suspend trading of the financial instruments
  • request the freezing and/or sequestration of
  • request temporary prohibition of professional

The Competent Authority 4
  • Competent authorities shall cooperate with each
    other whenever necessary for the purpose of
    carrying out their duties, making use of their
    powers whether set out in this Directive or in
    national law.
  • Competent authorities shall render assistance to
    competent authorities of other Member States. In
    particular, they shall exchange information and
    cooperate in investigation activities.

The Competent Authority 5
  • Competent authorities shall, on request,
    immediately supply any information required for
    the purpose referred to in paragraph 1. Where
    necessary, the competent authorities receiving
    any such request shall immediately take the
    necessary measures in order to gather the
    required information.
  • If the requested competent authority is not able
    to supply the required information immediately,
    it shall notify the requesting competent
    authority of the reasons.
  • Information thus supplied shall be covered by the
    obligation of professional secrecy to which the
    persons employed or formerly employed by the
    competent authorities receiving the information
    are subject.

The Competent Authority 6
  • The competent authorities may refuse to act on a
    request for information where
  • communication might adversely affect the
    sovereignty, security or public policy of the
    Member State addressed
  • judicial proceedings have already been initiated
    in respect of the same actions and against the
    same persons before the authorities of the
    Member State addressed or
  • where a final judgement has already been
    delivered in relation to such persons for the
    same actions in the Member State addressed.
  • In any such case, they shall notify the
    requesting competent authority accordingly,
    providing as detailed information as possible on
    those proceedings or the judgement.
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