Examples of market abuses and unethical business conduct
The illustrations below are examples of market abuses and unethical business conduct set out in the Securities Commission’s Guidelines on Market Conduct and Business Practices for Stockbrokers and Licensed Representatives.
You can get this from Bursa Malaysia website.
Illustration 1 – Action based manipulation
Company A engages PLC B to undertake certain projects. Company A then short sells securities of PLC B and subsequently cancels the contract with PLC B, causing the security price to drop significantly.
Illustration 2 -Trade-based manipulation
Mr. X hires Mr. Y as consultant to provide public relations and assist his company in realising the value of its stocks. As compensation Mr. X pays Mr. Y RM50,000 cash per month and gives him a warrant to purchase 100,000 shares from the company at RM1 per share.
Mr. Y along with three other accomplices, i.e. the brother-in-law, secretary, and a clerk opens 10 separate margin
accounts at 10 different brokers. Accounts are opened under a variety of names including dormant companies that Mr. Y controlled in order to hide Mr. Y’s identity.
Mr. Y and his accomplices engage in an aggressive series of wash trades and match orders. Trading is done between the accomplices at successively higher price to move the market price up. Mr. Y is also personally touting the securities to stockbrokers and other investors.
The security which now carries an inflated price is utilised to secure additional margin facility. The cycle is repeated several times. At a certain stage, Mr. Y dumps or sells all securities under his control, causing the price of the securities to plummet.
Illustration 3 – Painting the tape
Stockbroker A issues false trade reports for immediate publication to give an impression of activity or active trading in a counter to encourage investors to participate in order for stockbroker A to offset an unprofitable risk position.
Illustration 4 – Unethical trades
“Arrangers or Introducers” were verbally engaged by stockbroker C to assist and facilitate stockbroker C in obtaining pre-placement bond trades, with stockbroker C seen ostensibly as facilitating the bond transactions between different companies or financial institutions.
Four parties were involved, namely Company A, Company B, stockbroker C and Company D. Company A sold bonds to Company B, who then sold them to stockbroker C. Stockbroker C then sold them to Company D, who finally sold them back to Company A. The transactions were carried out at the same value date but at different price levels.
The bond transactions mentioned above would result in Company A incurring an “opportunity loss”, which accrued to the other parties involved. In other words, the other parties profited at the expense of Company A.
Profits from the bond trades would then be shared between stockbroker C and the “Introducers”, where the “Introducers” received significant profits from the bond trades.
In this case, stockbroker C is used as a conduit or “middle person” to take advantage of opaque two-way quotes in bond trades to benefit its clients by executing the deals at the expense of the initial bond buyer/seller where the latter did not get the best price.
Illustration 5 -Rollover
SBC A executed several married deals where the purchase and sale of securities did not involve any change in the beneficial ownership. The married deals were performed to give clients a deferment on settlement time for outstanding purchases (rollover).
The quantity and price of the securities transacted would be similar to the initial contract. However, the settlement period (due date) had been extended and additional brokerage was charged on clients for each rollover executed by the company.
Hence, the deals were transacted through the sales and purchases of securities without any change in beneficial ownership of the said securities.
Illustration 6 – Third party payment
Stockbroker A was instructed by Client A to purchase 10 million units of PLC P’s securities on behalf of Client B from Client C. At settlement, Client A instructed stockbroker A to utilise Client C sales proceed to set-off against the purchases made by Client B.
The sale of PLC P’s securities may not have involved a change in beneficial ownership of securities, as Client A had an interest in the securities before the purchase, and Client A had control over or was able to exert influence on Client B and/or Client C over the securities.
Illustration 7 – Marking the close
A remisier of stockbroker A assisted several clients by placing orders at the close of trading day, which caused the price of securities to move higher than the prior sales price. Simultaneously, orders at prices which are higher than the previous bid or lower than the previous offer were entered, and withdrawn before they could be executed, in order to give a misleading impression that there was demand for or supply of the securities at that price.
Illustration 8 – Front running
Dealer’s representatives handling accounts of several big institutions/retail clients executed trades for their individual clients or accounts of related persons prior to the execution of trades of the big institutions/retail clients, with the view to front run and make quick profits.
Illustration 9 – Conflicts
A person with knowledge of a favourable or unfavourable research report purchases or sells securities in advance of the report being released.
Illustration 10 – Scalping
The person trading is also responsible for giving buy or sell recommendations, e.g. purchases a security before recommending the security, and then sells the security at a profit upon the rise in the market price following the recommendation.
Illustration 11 – Spoofing
A person submits a large but not marketable limit order that raises the bid price of a security and/or greatly increases the quoted size at or around the current best bid price. The large order causes Market Participants to match or better the price of the order. The person then cancels the large order and enters (virtually at the same time) a sell order that matches the buy order of other investors at a higher price.
This is manipulation by “spoofing”. By temporarily manipulating the bid price upward, and causing other bids and trading interest at that level, the person receives a better price for his security than what would have been the prevailing market price and/or volume if the person’s large order had not been entered.
Spoofing is also used to manipulate the opening price of a security; e.g., via entry and immediate cancellation of lower priced sell orders with the objective of creating a more favourable buying opportunity for the manipulator.
Illustration 12 – Pump and dump
A person takes a long position in a security and disseminates misleading information about the security to inflate its price then disposes it at a higher price.
Illustration 13 – Trash and cash
A person takes a short position in a security and disseminates misleading negative information about the security to depress its price and to buy it at a lower price.
