Canada-based day trading firm Swift Trade has lost its appeal to the Upper Tribunal of the Tax and Chancery Chamber in the UK, after contesting an £8 million fine for market abuse imposed by the country's Financial Services Authority (FSA).
The decision to fine Swift Trade was revealed by the FSA last year following allegations the trading firm engaged in a manipulative trading strategy, known as layering, on the London Stock Exchange between January 2007 and January 2008. The tribunal described the incident as a "cynical course of intensive manipulation". The fine is the largest ever to be issued by the FSA for market manipulation.
The layering strategy let Swift Trade profit from a number of successive price movements in a wide range of UK shares. By using tens of thousands of orders sent in from all over the globe, Swift Trade was able to create a misleading impression of the supply and demand in the affected stocks. The trading firm is also alleged to have modified its trading pattern and changed DMA provider in March 2007, when the LSE raised concerns about its trading activity.
Swift Trade argued that its strategy was not market abuse because the orders involved derivatives that were used for hedging purposes. The argument was dismissed by the tribunal as "contrary to common sense and market practice". The tribunal also accepted the FSA's case that Swift Trade traders were actively encouraged to engage in the layering strategy by the firm's management.
"This was a particularly cynical case where a business model was based on market abuse. The approach taken by Swift Trade was novel and complex, designed to allow them to benefit at the expense of other market users, and to make detection more difficult," said Tracey McDermott, director of enforcement and financial crime at the FSA. "We urge other market participants to take note of this judgment which makes it clear that layering is abusive. We expect brokers and DMA providers to ensure that their clients implement appropriate controls to monitor their clients' trading activity closely to ensure that it is not abusive, and to report suspicious transactions."
Swift Trade was dissolved under Canadian law in December 2010 and its assets transferred to BRMS Holdings.