Trading desks are following good practice in preventing insider dealing, a Financial Conduct Authority (FCA) review on market abuse has found, but some potentially risky practices are still being used.
The FCA reviewed 19 asset management firms of varying types with assets under management of between £200 million and £100 billion, investigating the measure they took to detect and control market abuse.
All but three of the firms had a segregated equity dealing function, which is required to query suspicious and anomalous trades to understand the fund manager’s reasons for making the trade. Even among those firms that considered their trade volume to be too low enough to have a separate dealing desk, at least one required fund manager’s orders to be signed off by an independent colleague.
However, the FCA noted that some firms were not following best practice.
For example, one firm has no independent checks prior to the placement of orders. In another, the regulator discovered a single fund manager had integrated their dealer within the investment team but had not put any controls in place to ensure their work was independently checked.
Another point of weakness in pre-trade controls was the use of systems to control trading in cases where a fund manager may have been exposed to insider information.
For example, one firm did not have systems in place to prevent trading on behalf of exposed fund managers, meaning it would often take several hours to put trading restrictions in place. To prevent insider dealing the entire dealing desk were informed that trading should be barred, meaning information was being unnecessarily disclosed to large numbers of traders.
The FCA said firms should ensure they have systems in place to rapidly place controls on trades, meaning that traders should only discover there is a bar on trading a particular stock when they attempt to execute an order on behalf of a fund manager, in order to reduce the risk of other fund managers coming into contact with inside information.
The review concluded that, while many fund managers had put in place practices and procedures to control the risk of market abuse, there were few firms where this was comprehensive and asset managers need to do more to ensure all areas of their business include robust risk management to prevent insider dealing and control the distribution of information.