Until recently, the focus on monitoring market abuse has been applied almost exclusively to trading in the secondary markets. This is the space where vendors have focused their attention and where the biggest, most eye-catching fines and prison sentences have been levied by regulators and prosecutors.
However, over the last couple of years, there has been a notable series of important regulatory complaints and prosecutions brought against alleged market abuse related to the primary markets. These have not received the attention that they merit either from the vendor community or the surveillance teams in financial institutions; we believe that this needs to be addressed.
In this series, we will focus on four such cases and demonstrate why there are significant risks in this arena and why surveillance teams need to concern themselves with the detection of abuse in the primary market space.
Primary vs Secondary Markets
At the risk of stating the obvious, let’s be clear about what we mean by primary and secondary markets.
The term “capital market” refers to any part of the financial system that raises capital from bonds, shares, and other investments. New stocks and bonds are created and sold to investors in the primary capital market, while investors trade securities in the secondary capital market.
As such, secondary market transactions involve the day-today trading of stocks, bonds, futures, commodities, FX, and OTC derivatives. These can be traded on a variety of venues (including exchanges) and/or over the counter.
Primary market transactions involve issuing new shares or bonds to raise funds for companies, governments, and public sector institutions. When these shares or bonds are first sold to the public markets, the issuer will often simultaneously enter into other trades, such as bespoke interest rate swaps or structured FX trades, with the bank leading the transaction. For example, interest rate swaps may be used to hedge the interest rate risk related to debt servicing costs, whilst a foreign exchange transaction may be required when using the funds to acquire an asset in a cross-border transaction.
Until now, the case studies that we have presented have involved manipulation solely in the secondary markets consisting of: