Compliance

08:40 AM
Sinan Baskan, Sybase
Sinan Baskan, Sybase
Commentary
50%
50%

Market Fraudsters vs. the Genuine(rs): Who's Winning?

Managing systemic risk — and preventing market abuse — is one of today’s greatest challenges, and regulators have been intensifying their efforts to clean up the markets. But are the good guys winning the war against fraudsters?

Sinan Baskan, Sybase
Sinan Baskan is Vice President, Financial Services Group, at Sybase.

The U.S. Securities and Exchange Commission (SEC) reported winning 735 legal actions against market fraudsters in 2011. That is 8.6 percent more than in 2010, making 2011 a record for a single year.

Not to be outdone, another Wall Street watchdog, the U.S. Commodities Futures Trading Commission (CFTC) announced that it hunted down 99 fraudsters in fiscal 2011, a 74 percent jump and another record.

In the previous year, the Financial Industry Regulatory Authority Inc. (FINRA) sent more than 550 potential fraud cases to the SEC or other federal law enforcement agencies for further investigation.

Across the pond, the U.K. Financial Services Authority (FSA) issued a record £10.5 million in fines on individuals in 2011, with one fraudster penalized £4 million, an individual record. Taking on tougher cases and increasing its focus on individual fraudsters dropped the FSA's total actions to 59 in 2011, down from its all-time record of 80 in 2010.

These numbers tell us that regulators are busily trying to maintain the integrity of world financial markets. What they don't tell us is: Who's winning — fraudsters or the genuine(rs)?

Elusive Figures

No single pair of eyes monitors the world's financial markets, so no one can truly say that all markets are monitored or all market manipulation gets investigated. Consequently no one knows the ratio of successfully convicted market manipulation cases to total trades on the world's stocks markets.

“This type of information is not in the public domain, but everyone knows it is infinitesimally small,” independent financial markets adviser Avenues Alliance wrote in a 2011 blog. “While trade volumes in each of Europe, North America and Asia soar into their millions on a daily basis, the annual volume of successfully convicted market abuse cases remains below 5,000 globally (we estimate).”

Avenues Alliance’s estimate may be conservative given that the U.S. (the world’s largest market), the U.K. (the leading international finance center) and Australia (the 13th largest market) rounded up a total of only 1,459 market manipulators.

Such figures are elusive. No one appears to have claimed with any accuracy either that the number of market manipulators apprehended in 2011 is evidence of an overall win for enforcement or that it is merely the tip of an iceberg.

Manipulation Is Part of the Market

“Capitalism earns its keep through Adam Smith’s famous paradox of the invisible hand: self-interest, operating through markets, leads to the common good,” Professor Jeffrey D. Sachs of Columbia University, a leading international economic adviser to governments and corporations, told the Financial Times in January. Yet the paradox of self-interest breaks down when stretched too far.

“This is our global predicament today,” he said.

Manipulative market conduct is part of the market fabric, according to Alison Crosthwait, director of global research at New York-based institutional broker Instinet.

“Many of the [SEC's] enforcement actions — such as those against Pipeline Trading and Swift Trade — have proven to be responses to age-old issues (market manipulation and lack of transparency/honesty) rather than new issues brought about by technological advancement,” she wrote on Tabb Forum in January.

It is a distinction that the financial services industry, led by representatives such as SIFMA, is keen to promote as regulators strain to stay abreast of the fast-moving technological arms race that is the world's stock markets. Fraudsters can work manually or electronically, SIFMA notes, and regulations prohibit unacceptable trading practices equally either way.

Previous
1 of 2
Next
Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
MedicalQuack
50%
50%
MedicalQuack,
User Rank: Ninja
3/14/2012 | 2:07:47 AM
re: Market Fraudsters vs. the Genuine(rs): Who's Winning?
It's time to clean up the math and formulas...fix those "as" clauses that come to haunt later <grin>. -
More Commentary
Wall Street CIOs Have a Vendor Management Problem
If Wall Street CIOs want to stay ahead of competition and ensure high-speed trading software doesn't start the next flash crash, they need better insight into vendor delivered software.
Technology Innovation Returns to Financial Services
Capital Markets Outlook 2015: Following a few years dominated by regulatory compliance and cost saving technology initiatives, financial organizations are finally investing in innovative technology and tools.
Voice Biometrics Improve Transaction Monitoring Fraud Detection
Why voice biometrics should be a part of your fraud prevention strategy in the call center.
Fintech Fast Forward 2015
What will shape the future of Fintech in 2015 and beyond?
Look Deeper at Business Connections
When a business person or practice crosses the line, what should a professional do?
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8, October 2014
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Video
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.