BSM market surveillance: Cases of market manipulation and insider trading 1 Restricted Confidential Confidential Internal Use Public
7th IOSCO AMCC Training Seminar
BSM Market Surveillance:
cases of market manipulation and insider trading
X
Tokyo, April 2014
BSM market surveillance: Cases of market manipulation and insider trading 2
AGENDA
Regulatory framework
Case 1 – Market manipulation
Case 2 – Artificial conditions and market manipulation
Case 3 – Artificial conditions by offers (layering)
Case 4 – Insider trading
BSM market surveillance: Cases of market manipulation and insider trading 3
Regulatory framework
• IOSCO Objectives and Principles of Securities Regulation
– Principles for Secondary Markets
Principle 36: Regulation should be designed to detect and deter manipulation
and other unfair trading practices.
BSM market surveillance: Cases of market manipulation and insider trading 4
Regulatory framework
• The Brazilian regulatory framework
– Law 6385/1976
Makes provisions on the securities market and establishes the Brazilian
Securities Commission (CVM)
Provides that exchanges are auxiliary regulatory entities responsible
for surveilling market activities and market participants
– CVM Instruction 461/2007
Regulates and governs regulated securities markets and makes provisions on
the formation, organization, operation and extinction of stock exchanges,
commodities exchanges, futures exchanges and organized over-the-counter
markets
BSM market surveillance: Cases of market manipulation and insider trading 5
Regulatory framework
• The Brazilian regulatory framework (cont.)
– CVM Instruction 8/1979
I - Managers and stockholders of public companies, intermediaries, and other
participants in the securities market are prohibited from creating artificial conditions
of demand, supply, or price of securities, from engaging in price manipulation, in the
execution of fraudulent operations, and in the use of unfair practices.
II - For the purposes of this Instruction, the following concepts shall apply:
– a) artificial demand, supply or price conditions of securities are those created as a result of
trades performed by participants or intermediaries that, due to fraudulent action or intentional
omission, cause direct or indirect alterations in the flow of purchase or sale orders for securities;
– b) price manipulation on the securities market is the utilization of any process or stratagem
intended directly or indirectly to raise, maintain, or lower the quotation of any security, inducing
third parties to purchase and sell it;
– c) fraudulent trading on the securities market is that which uses deceptions or stratagems to
induce or maintain third parties to commit errors, for the purposes of obtaining illicit equity gains
for the parties involved in the operation, the intermediaries or third parties;
– d) unfair practice on the securities market is that which directly or indirectly results, effectively
or potentially, in treatment for any of the parties in negotiations involving securities, which
places them in an improper position of imbalance or inequality with respect to the other
participants in the transaction.
BSM market surveillance: Cases of market manipulation and insider trading 6
Regulatory framework
• The Brazilian regulatory framework (cont.)
– BM&FBOVESPA rules
BSM market surveillance: Cases of market manipulation and insider trading 7
AGENDA
Regulatory framework
Case 1 – Market manipulation
Case 2 – Artificial conditions and market manipulation
Case 3 – Artificial conditions by offers (layering)
Case 4 – Insider trading
BSM market surveillance: Cases of market manipulation and insider trading 8
Case 1 Market manipulation
• Manipulation by uncovered sell position at the closing to reduce the price in the day before the increase
of representativeness of the stock in the Bovespa index (increase in manipulation impact on Ibovespa)
• Manipulator was long in Ibovespa futures and won with the settlement
• There was a failure to delivery in half of the uncovered sell positions
• Manipulator and beneficiary is an institution related to the broker
-
200.000.000,00
400.000.000,00
600.000.000,00
800.000.000,00
1.000.000.000,00
1.200.000.000,00
1.400.000.000,00
1.600.000.000,00
1.800.000.000,00
0,10
0,15
0,20
0,25
0,30
0,35
0,40
0,45
0,50
0,55
0,60
10
:06
10
:43
10
:58
11
:13
11
:28
11
:43
11
:58
12
:13
12
:28
12
:43
12
:58
13
:13
13
:37
13
:52
14
:13
14
:28
14
:43
14
:58
15
:13
15
:28
15
:43
15
:58
16
:13
16
:28
16
:43
17
:59
10
:47
11
:02
11
:17
11
:32
12
:06
12
:21
12
:36
12
:51
13
:06
13
:26
13
:41
13
:56
14
:11
14
:26
14
:41
14
:56
15
:11
15
:26
15
:41
15
:56
16
:25
16
:40
17
:41
17
:57
30/08/2013 02/09/2013
Va
lue
(R
$)
Pri
ce
(R
$)
Volume Preço
% price of -41,5%
34,4% of the selling value was traded
by clients of the same broker.
Day 1 Day 2
1 -> Last price before the closing
2 -> Closing price
3 -> Opening price
• Result = + R$ 10,6 millions = + R$ 20,7 millions (Future) - R$ 10,1 millions (spot)
BSM market surveillance: Cases of market manipulation and insider trading 9
Case 1 Layering
• BSM Action
– Open of an Administrative Proceeding
BSM market surveillance: Cases of market manipulation and insider trading 10
AGENDA
Regulatory framework
Case 1 – Market manipulation
Case 2 – Artificial conditions and market manipulation
Case 3 – Artificial conditions by offers (layering)
Case 4 – Insider trading
BSM market surveillance: Cases of market manipulation and insider trading 11
Case 2 Artificial conditions and market manipulation
366
367
368
369
370
371
372
3731
1:5
01
1:5
51
1:5
71
1:5
81
1:5
91
1:5
91
1:5
91
1:5
91
2:0
11
2:0
21
2:0
21
2:0
51
2:1
01
2:1
51
2:1
81
2:1
91
2:2
01
2:2
01
2:2
11
2:2
31
2:2
71
2:2
81
2:3
01
2:3
11
2:3
11
2:3
11
2:3
11
2:3
21
2:3
41
2:3
71
2:3
71
2:4
21
2:4
21
2:4
31
2:4
51
2:5
01
2:5
31
2:5
31
2:5
51
2:5
51
2:5
51
2:5
51
2:5
7
Price evolution between CFO tradings
Cotação Cotação da Companhia CFO
Selling trades of the company are
essencial to the price decreasing in the
moment that CFO will buy against the
Price R
$
Buying trades of the company are
essencial to the price increasing
in the moment that CFO will sell
Company's performance Price
Buying trades of the
company help to rise the
BSM market surveillance: Cases of market manipulation and insider trading 12
Case 2 Artificial conditions and market manipulation
• CFO is partner and authorized to give orders in name of the companies from the same economic group
• All trading (day trading) are executed by the same trade
• Period: 55 days during 4 months
Manipulador interfere no book de ofertas, lançando ofertas de venda a preços cada vez menores
Quando aparece uma oferta de venda a preço que ele considera interessante em lote que ele considera adequado ele executa a compra e cancela as ofertas de venda
CFO
Profit R$ 103 mil
Trade
Profit R$ 150 mil
Trade’s wife
Profit R$ 112 mil
day-trades Loss R$ 1 million
Economic
Group
BSM market surveillance: Cases of market manipulation and insider trading 13
Case 2 Artificial conditions and market manipulation
• BSM’s Action
– Administrative Proceeding iniciated in 2012
Settlement Agreement: R$ 1,2 millions
Judgement for violations related to ICVM 301
BSM market surveillance: Cases of market manipulation and insider trading 14
AGENDA
Regulatory framework
Case 1 – Market manipulation
Case 2 – Artificial conditions and market manipulation
Case 3 – Artificial conditions by offers (layering)
Case 4 – Insider trading
BSM market surveillance: Cases of market manipulation and insider trading 15
Case 3 Artificial conditions by offers (layering)
• Manipulator raised the bid price (from 12,56 to 12,60) to sell;
• The steps created in the bid side attract buyers and the manipulator alternate to the other side of the
book to sell;
• There are trading in which the manipulator is the buyer and the selller to clean the book and achieve the
attracted buyer;
• After the trade, manipulator cancelled the rest of the bid offers (artificial offers).
Ask offers Bid offers
BSM market surveillance: Cases of market manipulation and insider trading 16
• Manipulator repeat the strategy on the other side of the book to buy at lower price and obtain profit in day
trading
• Manipulator executes the strategy in 45 days, with total of 69.600 tradings
• Total profit of the strategy: R$106.000,00
Case 3 Artificial conditions by offers (layering)
Ask offers Bid offers
BSM market surveillance: Cases of market manipulation and insider trading 17
Case 3 Artificial conditions by offers (layering)
• BSM Action
– Accusation Term in process
BSM market surveillance: Cases of market manipulation and insider trading 18
AGENDA
Regulatory framework
Case 1 – Market manipulation
Case 2 – Artificial conditions and market manipulation
Case 3 – Artificial conditions by offers (layering)
Case 4 – Insider trading
BSM market surveillance: Cases of market manipulation and insider trading 19
Case 3 Insider trading
• Non expected decision from Banco Central do Brasil reducing basic interest rate (SELIC)
• Investor trading outside his pattern (sells DI options (future interest rate contract)) with profit of R$ 217
mil
August 29 and 31 – Investor sells 12,000 options na
average price R$ 18,11, after this the options lost its value.
BSM market surveillance: Cases of market manipulation and insider trading 20
Case 3 Insider trading
• BSM’s action
– Investigatiion sent to CVM
BSM market surveillance: Cases of market manipulation and insider trading 21
Contact
Marcelo Deschamps D’Alvarenga
Head of International Affairs
(+55 11) 2565-4763