Market Manipulation is a mainstay of annual regulator priority lists. Bates frequently assists our clients in internal investigations as well as in investigating allegations brought by U.S. authorities (SEC, CFTC, DOJ), self-regulatory organizations (including FINRA and exchanges), international agencies, and private parties.
We also have substantial experience with matters involving a variety of alleged market manipulation schemes, including (but not limited to) wash trading, match trading, front running, painting the tape, banging the close, and pumping & dumping of thinly traded securities. Most recently, we have been engaged to handle issues arising in high-frequency trading, such as spoofing and layering, as well as in the context of foreign exchange markets.
Bates experts and staff bring high-level expertise when conducting detailed evaluations of the trading at issue, comparing the activity identified to (i) the pattern of trading for the security as a whole and (ii) the historical trading of the alleged manipulator(s). Trading which may otherwise look suspicious may, in fact, be perfectly legitimate behavior after contextualizing the activity. Bates experts can provide invaluable guidance regarding trading strategies, risk management principals, and/or hedging strategies that may also explain the pattern of activity identified, alongside big-data-driven analyses and qualitative reviews of emails, phone calls, and messages conducted by Bates staff.
Spoofing / Layering
Bates assisted a client in proactively investigating an issue identified by their internal controls. Our staff and experts completed a comprehensive review of trading activity over a multi-year period for an equity security traded on both U.S. and International exchanges. Bates collected and modeled detailed order book information to evaluate the following characteristics related to the market microstructure of trading in the security across both exchanges:
- Cancellation activity
- Trade-to-order volume
- Short bursts of sell initiated volume, pre-market selling activity versus subsequent trading
- Time to cancel
- Concentration and pattern of cancelled orders on particular days/times
- Execution proximity to best bid/offer
- Order size
- Other factors
These same characteristics were evaluated for shifts in market dynamics over time and in comparison to trading on the same exchanges in peer company securities while also noting differences/similarities in trading across the two exchanges. The price impact of potentially noneconomic trading was established, and a formal report was submitted, as well as several reports rebutting the findings of the regulator, culminating in testimony by a Bates expert before the regulator.
Forex Market Manipulation / Round-Trip Trading
Bates experts were called upon to evaluate the conduct of a team of traders within a large global financial institution for a variety of issues, including trading ahead of client orders, inappropriate trade mark up, indications of market manipulation or attempted manipulation, and round-trip trading—in the latter two areas we also considered the behavior and involvement of traders from other major financial institutions. The analysis required a detailed investigation of daily trading, spreads, and quotations on major currencies and currency derivatives, as well as interviews and communication reviews of the alleged involved parties. The report prepared by Bates identified significant failures in the institution’s internal supervisory and control processes and was relied upon in subsequent litigation.
Pump & Dump
In a recent investigation, Bates was asked to assess the trading of an individual who had accumulated an ownership interest in multiple penny stocks as payment for consulting services rendered. This individual was then alleged to have used both his accumulated ownership and access to company insider information to conduct a classic “pump & dump” of the stock. Bates performed a detailed quantitative assessment of his trading using both publicly available data and Blue Sheets, as well as a qualitative assessment to establish interrelationships between parties via phone records, text message exchanges, and emails. Bates provided detailed timelines of trading activity that included news events, volume, intraday pricing, short interest, and other relevant characteristics. We prepared interactive models showing the relationships between parties, their trading behavior versus the rest of the market, and other demonstratives. We then estimated potential damages following a modified share price inflation methodology. As a result of the work Bates performed, additional potential market manipulators were identified.
Wash Trading / Match Trading
On a criminal pump & dump matter, Bates performed the full range of analyses listed above in addition to preparing demonstratives specifically concerning wash or matched trading. During the course of performing our analysis, Bates was informed that several of the alleged manipulators pled not guilty on the basis that they were unaware that the manipulation was taking place. Bates assessed their trading records, Blue Sheet data, and communication records to establish that, at a minimum, they had knowingly participated in wash or matched trading during the manipulated period.
The Regulatory & Internal Investigations team has significant experience in conducting reviews related to insider trading, in both civil and criminal proceedings. These reviews generally follow a two-step approach, beginning with a quantitative focus and concluding with a qualitative focus.
Beginning with the trading activity, Bates will first identify trades which allowed an investor to achieve outsized gains or to avoid outsized losses. The securities reviewed can be selected through prior research conducted by the regulator or counsel, or they can be determined by statistical analysis.Typically, Bates will begin by identifying trading days in the at-issue securities which experienced statistically significant abnormal price returns. Once identified, those days are then compared to the individual (or individuals) trading. Additional statistical analysis can then be used to identify the likelihood of a particular trade being made in “perfect timing” before a market movement, which is then expanded to cover the likelihood of a single individual (or individuals) trading with “perfect timing” for the totality of “perfect” trades.
This analysis is further informed by the at-issue individuals’ prior trading; how often have they traded similar securities (by industry or other factors) in the past, how often do they trade options (for example), what have their historic returns been on trades of the same type? This information helps contextualize the trading at issue, at which point qualitative information such as emails, phone records, text messages, significant news releases, etc. are incorporated into the analysis to provide additional context. As a final step, Bates can also assist in estimating the implied gain achieved (or loss avoided) that was derived from the insider trading activity.