March 13, 2012

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.