FSA plans clampdown despite no evidence of HBOS manipulation
The UK's Financial Services Authority said today it had launched a review of the systems and controls at financial firms for dealing with market rumours despite its investigation into trading activity in UK bank HBOS during its rights issue failing to uncover evidence of deliberate market manipulation.
On the afternoon of March 19, the FSA launched an investigation into trading in HBOS after the bank's shares fell by 17% to 398p by 08.52am on that day as negative rumours swept the market.
These rumours focused on a British bank that faced funding difficulties and several identified HBOS by name. There was also speculation that the governor of the Bank of England had cancelled his Easter holiday in order to resolve a liquidity problem at HBOS or to bail out HBOS.
Market commentators speculated that the fall in HBOS's share price, which ended the day 7% below the previous day's close, was the result of traders spreading false rumours in order to drive down the stock so that they could profit from their short-selling positions.
The FSA said today that its investigation of the rumours on March 19 had "not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price".
The regulator said that the rumours were circulated at an uncertain time for the UK banking sector and days just days after the Federal Reserve had helped to broker the takeover of Bear Stearns by JP Morgan, when traders were prepared to act on negative market information.
It added that it was difficult to assess the impact that the temporary halt in automated trading between 08.43 and 08.52 on March 19 had on trading. It said the shareprice was also affected by the interaction of a "number of other complex factors", including the effect of algorithmic trading strategies, which amplified the impact of the initial downward trend in the HBOS share price.
As a result of its investigation, the FSA announced today that it is examining what policies financial firms have in place to for dealing with market rumours. For example, whether and how rumours are verified; whether traders are permitted to pass on or trade on rumours; how firms ensure staff do not initiate or spread false rumours; and how firms ensure compliance with their rules in this area.
This review covers investment banks, securities firms and hedge fund managers and the FSA said it will publish its findings in the early autumn.
-- write to Dawn Cowie at dcowie@efinancialnews.com
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