About market manipulation
Market manipulation is where someone misleads (or attempts to mislead) the market by actions or omissions that give a false appearance of trading activity, supply, demand or the value of financial products.
It involves financial products that are traded on a licensed market such as NZX or ASX, in particular shares, bonds and derivatives.
It can include inflating or deflating the market price or otherwise affecting the behaviour of the market, such as through false information or rumours, or deceptive trades.
The Financial Markets Conduct Act 2013 (FMC Act) includes provisions for two types of market manipulation: information-based and transaction-based.
Information-based manipulation
This is where someone says something - or otherwise shares information about a financial product - that they know (or should know) contains information that is false or seriously misleading.
Market manipulation occurs if what they say is likely to make a person trade in that product, or affect the price; or influence the way someone will vote on shareholder decisions.
Examples:
- ‘Pump and dump’ – where the manipulator ‘pumps’ up the price, e.g. by telling everyone the company is under-valued, before ‘dumping’ or selling their shares when the price increases.
- ‘Poop and scoop’ - where the manipulator talks down the price, e.g. by saying the industry is facing issues, before buying the undervalued shares.
Market manipulation can happen in internet chat rooms and social media accounts used by those interested in trading securities. Users have to be careful not to post statements about certain companies, or particular market activity, that are not true or that they do not have a reason to believe are true. This sort of commentary may attract the interest of the NZX Surveillance team or the FMA.
Transaction-based manipulation
This is where someone does something, or chooses not to do something, through orders or trades in the market, that will (or could) give a false or misleading impression about a financial product, e.g. about its popularity, availability, price or value.
Examples:
- Someone might attempt to manipulate the market by placing orders to buy shares when they do not actually want or intend to buy them. This would give a false impression of demand for the shares.
- Buying and selling the same financial products at the same time risks creating a false or misleading appearance about the true market interest in the product. Placing multiple orders in the market at different prices can also amount to market manipulation.
- There is danger of being accused of market manipulation when buying or selling a share or other financial product that is not traded very much (it is “illiquid” or “thinly traded”). This is because only a few small trades may move the price and create the appearance of market activity. This is a particular risk when trading in some of the small, illiquid companies listed on NZX.
In any of these examples it isn’t a defence for a person to claim they didn’t know it would give a false or misleading impression. The FMC Act says if they “ought reasonably” to have known, then that is a contravention.
The size or value of an order or trade doesn’t matter if its purpose was manipulation. It is also irrelevant whether or not a person makes any financial gain, or whether their actions actually affect the market – the test is whether they were “likely to” give a false or misleading impression.
There are some exceptions to these provisions. For more information, see the Financial Markets Conduct Act 2013, Part 5, Subpart 3—Market manipulation.
To avoid any perception of manipulation, orders and trades should only be placed when the intention to buy or sell is genuine, and a trade should never be used to set a price for a financial product.
Why market manipulation is unlawful
The FMA’s mission is to make New Zealand’s financial markets fair, efficient and transparent. We want to ensure our markets reflect genuine supply and demand, in order to preserve their integrity and reputation.
If investors believe the values of financial products are being dishonestly or recklessly influenced, and they can’t trust prices or market activity, it may have a serious impact on investor confidence and make people less likely to want to trade on the market. This in turn reduces demand for, and liquidity in, our listed issuers’ shares, and ultimately makes it harder and more expensive for local companies to raise capital for investment in their businesses. This hurts the economy and makes it harder for companies to compete.
One of the purposes of the FMC Act is to promote confident and informed participation in New Zealand’s financial markets, with a view to growing our capital markets. Market manipulation endangers the achievement of this purpose.
What we can do to stop it
Where potential issues are raised directly with the FMA, our initial response is to contact the Surveillance team of NZ RegCo (the NZX's regulatory agency, formerly NZX Regulation).
NZX, as the market operator and frontline regulator of New Zealand’s main licensed markets, is tasked with watching activity on its markets to look out for signs of “market misconduct” such as manipulation. NZX Participants, the firms which give people access to trade on NZX’s markets, also report concerns about client activity to NZ RegCo.
They investigate any activity that could indicate market manipulation and refer cases to the FMA where there is reasonable suspicion that conduct could be illegal.
We assess every instance of potential market manipulation NZX refers to us. Our response will be based on whether we form the view that market manipulation has occurred or been attempted. With sufficient evidence, we take appropriate action.
Penalties for market manipulation
The FMA has a range of enforcement tools it can use to deter people from attempting or engaging in market manipulation, and discipline those who do, ranging from a formal warning right up to prosecution.
The tool we use depends on the circumstances of the case. Factors we might take into account include the person’s trading history, the level of sophistication, the impact on others, and the public interest in pursuing court action.
In the most serious cases, market manipulation may amount to a criminal offence and be punishable with up to five years imprisonment, and a maximum fine of $500,000 for individuals or $2.5 million for companies.
Examples
Inexperienced online trader warned (2015)
In January 2015, the FMA issued a warning to an inexperienced online trader in relation to suspected market manipulation trading conduct.
The FMA alleged he had traded with himself in a way that was likely to have the effect of creating a false or misleading appearance about the extent of active trading in, supply of, price for, or value of, the shares traded. Such conduct may attract other traders into the market
In deciding to issue a formal warning, on a no-names basis, the FMA took into account a number of factors including the inexperience of the trader, his claim he wasn’t aware trading with himself was prohibited, and his co-operation with the FMA through the investigation.
More on this case
Mark Warminger (2015)
In 2015, the FMA issued civil proceedings in the High Court against Mark Warminger for alleged market manipulation during his employment as a fund manager at Milford Asset Management Limited, in 2013-14.
The allegations related to misleading appearance of trading, including placing small trades directly on the market, followed by large off-market trades in the opposite direction.
In 2017, the High Court declared that Warminger had contravened the market manipulation prohibitions on two occasions and ordered him to pay a pecuniary penalty of $400,000. As a result of the court’s finding, an automatic five-year management ban was applied.
More on the Warminger case
Brian Peter Henry (2014)
In August 2014, Brian Peter Henry admitted breaching the market manipulation prohibitions in the Securities Markets Act 1988.
On two occasions Henry traded one company’s shares with himself, which moved the share price without any change in the ownership of the shares. He also admitted to creating a false or misleading appearance of trading in the same company’s shares including by placing multiple orders for buying and selling without completing the trade.
The High Court in Auckland imposed a pecuniary penalty of $130,000. The prosecution followed a referral from NZX.
More on the Henry case
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