Direct market access

FSA urges DMA providers to protect against abuse

UK financial regulator the Financial Services Authority (FSA) has issued a statement outlining its concerns about the practice of ‘layering’ or ‘spoofing’ – submitting orders without the intention to trade – in exchange order books by traders using brokers’ direct market access (DMA) services.

The regulator argues that the practice could constitute market abuse in terms of both market manipulation and creating a misleading picture of supply and demand for securities. It says that where abusive practices are detected by trading platforms’ monitoring systems, it will consider taking action against the individual or the firm involved in the trading.

However the regulator adds that it may also consider taking supervisory or enforcement action against DMA providers that it deems to lack the appropriate systems and controls to identify and prevent spoofing.

According to the FSA, the most commonly occurring example of spoofing is where a broker’s DMA client ‘layers’ the order book, submitting multiple orders on one side of the order book slightly away from the touch, then submits the order it intends to trade on the other side of the book. Once the intended order is executed, the client will cancel the initial multiple orders.

Brokers say ensuring the necessary checks are in place is a continual process. "UBS is obviously supportive of FSA goals related to monitoring abusive market behaviour.

We believe our current DMA checks are thorough and are comfortable that they provide sufficient controls in this regard," said Tim Wildenberg, head of direct execution, EMEA at broker UBS. "However, we continually review them as the market evolves, and as is our practice, we are constantly looking at whether we can improve them."

Wildenberg adds, however, that DMA providers’ checks alone cannot guarantee detection of spoofing. "Spoofing would be easy to spot if, for example, someone were to send us five consecutive orders that are a tick apart," he said. "However, if a client sends us one order, and is using three more providers for the others, we'd only get to see a part of what they are doing, so potentially abusive behaviour would be harder to spot."

The FSA’s announcement closely follows a compliance update issued by the London Stock Exchange (LSE) in July reminding members of their obligations to have spoofing controls in place when allowing clients to execute orders using their trading identification.

In June, the LSE issued a private censure and a £35,000 fine against a member that had failed to properly control the order flow of a routing client that the exchange deemed to be spoofing.