By Peter Wright and Julianna Tolan, Fox Williams
High Frequency Trading (HFT) continues to court controversy in the media, financial markets and the political sphere. Cases such as last year’s “Hound of Hounslow” have shone a greater light on the sector and caused many to question this line of finance.
Regulators are now under continuing pressure to police the methods being deployed by these hyper-fast technologies and algorithmic trading practices.
In response, a new piece of legislation, called the Market Abuse Regime (MAR) which came into effect across the EU in July 2016, makes far more explicit links to this industry than any legislation before it.
For firms involved in HFT, the question now is: what does this mean for the policing of their operations?
MAR is designed to tackle several types of manipulation of the financial markets and to empower domestic authorities to prevent, detect and punish this abuse in all its guises.
While much of MAR is directed at more traditional forms of manipulation, there are also signs that regulators are alive to the challenges posed by changes in the marketplace. For example, MAR applies to newer markets like the emission allowances market; and it reacts to recent scandals by expressly prohibiting the manipulation of financial benchmarks like Libor.
But it is the focus on HFT that really catches the eye. MAR provides clarity on what constitutes “market manipulation” when applied to algorithmic and HFT practices.The new regime identifies certain trading methods that would, if used, be likely to constitute market abuse. These include:
- “Painting the tape” – entering into orders to trade in a transaction or series of transactions which are shown on a public display facility to give the impression of activity or price movement in a financial instrument
- “Quote stuffing” –where large numbers of orders are placed and then withdrawn quickly, to flood the market with quotes to be processed
- “Pump and dump” – taking a long position in a financial instrument and thenundertaking further buying activity and/or disseminating misleading positiveinformation about the financial instrument with a view to increasing its price. Whenthe price is artificially high, the long position held is sold
- “Layering” –submitting multiple orders, typically on a single stock, to create the impression that it is highly liquid
- “Spoofing” – placing a large number of orders to sell shares, then rapidly cancelling the order, in order to create pessimism around their value, before purchasing them at a lower price
Conduct is also likely to be deemed market abuse where a trader sends orders to a trading venue by means of algorithmic trading without the intention to trade, and instead to do one of three things: disrupt or delay; obstruct identification of genuine orders; create a false or misleading impression about supply/demand.
Clearly, the FCA is stepping up the focus on HFT.
The question now vexing those working in this space is whether MAR actually changes things when it comes to proving wrongdoing and prosecuting it.
There is a feeling that MAR has in fact done very little to alter the status quo and some question whether it has gone far enough to address the increasingly sophisticated forms of HFT.
The “Hound of Hounslow”, mentioned above provides a good example of this debate. Navinder Sarao was accused of using HFT to cause a £500 billion markets “flash crash” in 2010. An automated trading program he built was used to “spoof” markets, generating large sell orders that pushed down prices. Those trades were then cancelled,before buying contracts at lower prices, profiting as their value increased again.
Mr Sarao challenged his extradition to the US on the basis that his alleged conduct wasn’t a crime in the UK. The challenge was unsuccessful and the Home Secretary signed an order for his extradition earlier this year.
Would MAR have changed the outcome of Mr Sarao’s extradition?
Having said that, the objectives of MAR are reinforced by new requirements introduced under another piece of new legislation – MiFID II. These mandate that a person must notify their home regulator if they engage in algorithmic trading.
Where a person uses a HFT technique, they will generally also be subject to regulatory authorisation. So if a person uses a HFT technique, they will need to consider the need to be authorised by the FCA and notify it that they are engaged in algorithmic trading.
So what does this all mean? Well, if you or your firm are involved in HFT, there is definitely a sharper lens focusing on your business. Indeed, another ‘flash crash’ in August 2015 significantly dented investor confidence and was again widely attributed to market disruption by HFT. While that view was contested by some, it only served to heighten the increased focus on the sector.
HFT operators should not ignore this, they must consider how to mitigate the risks that MAR now poses.
High-yield bonds will help, not hinder, businesses’ recovery
By Jesse Chenard CEO of fintech MonetaGo,
One of the best indicators of stock market growth is high-yield bonds. The junk bond market is more important than ever as we recover from coronavirus – allowing companies to raise vitally needed capital and giving investors the opportunity for returns that will fuel speculation and drive growth across the whole economy. Junk bonds, or ‘high-yields’ to give them a less derogatory name, will drive the recovery just as surely as the rebounding stock market will.
Companies who have suffered with low liquidity under the pandemic need to raise capital and return to viability. According to J.P. Morgan Chase, bond-issuance has already reached $238 billion – almost double this time last year. It is clear that high-yield bonds are going to drive economic recovery and allow viable, but cash-strapped, companies to regain losses caused by Covid-19.
Companies striving to boost their capital, improve liquidity and rebuild after the pandemic need systems around issuance to be quick, effective and secure. Yet, the issuance process remains slow, costly and encumbered by legacy systems.
Avanade’s research found that up to 80% of IT budgets are allocated to keeping legacy systems running. Technology can help reform the process and give companies the funds they so badly need.
According to Bloomberg, global corporate bond issuance is on track to reach a historical high in 2020, as total capital raised neared $6.4 trillion (June)— already 71% of 2019’s total.
But the process of issuing bonds is unbelievably slow and largely manual. It takes an average of 30 stages with human intervention at each point, including physical paperwork and contact between multiple parties and intermediaries.
The fact that so many of these processes are still multi-step and using people and paper is archaic and inefficient in normal market conditions.
During the lockdown, it looks positively stone-age. And then there is the risk of data leakage and security, which are horribly compromised by existing processes. Two years ago, I visited Credit Suisse’s office on Madison Avenue where they told me that they send 20,000 to 30,000 faxes a day to carry out activities that could be very easily automated and digitized: a scary thought from a data security perspective.
It seems odd that in a world where we are used to securely accessing our personal finances at the click of a button, the same cannot be true for business finance.
This is a massive, liquid market. It needs modernizing. Add to that the fact that volumes have ballooned as crisis hit firms work to raise working capital and return to viability. That process should be entirely digitized and speeded up. Companies recovering from the pandemic deserve better than outdated, unsecure systems.
There is no question that technology is the key here. There are solutions to digitize the entire process, allowing businesses to greatly reduce their time to market and their banks to provide a vastly improved service to their corporate customers.
When normal ways of working are disrupted, it brings to light the inefficiencies in document workflows that cost businesses thousands of dollars in fraud each year, not to mention the other cost of lagging behind due to outdated processes.
There is now an opportunity to take the lessons learned from the pandemic and digitize processes that have shown they need it. Covid has forced financial services to digitize in many ways but the high-yield bond market is lagging behind. We need to bring this crucial sector up to speed. Companies deserve fast, efficient and secure issuance systems to stimulate their recovery and kick start the global economy.
Finance leaders must act against increasing fraud
By David Thorley, Director of Customer Development, FISCAL Technologies
The COVID-19 pandemic has resulted in a whole host of increased pressures on both business and individuals, worsening issues and vulnerabilities that were already present, as well as shining a light on new issues, never witnessed before. With this in mind, retaining and protecting cash has never been more important and therefore the role of accounts payable and the procure-to-pay function are crucial. These functions need to work together and do so proactively in order to succeed in the current climate.
It is also key that AP teams have all the right financial controls in place to minimise errors, maximise visibility of transactions, and streamline processes – especially with so many people now working from home and the various compliance challenges this creates. In essence, it is about taking a more forensic approach to AP activities.
According to fraud experts, each company has around a one in three chance of experiencing internal fraud this year, with enterprise organisations averaging losses of $1⁄2m. These attacks typically claim payments which are under the financial risk review threshold, hiding within the hundreds of small invoice transactions until found by AP Audit software or internal audit routines.
Finance ERP and P2P systems – often described as the heart and lungs of a company – have a complex relationship and are known to have vulnerabilities, opening them to fraud. This is especially true in enterprise organisations where the adoption of artificial intelligence (AI), complex system integration and automation delivers a touchless-AP process, but may lack in the controls of traditional processes.
Additionally, centralisation or de-centralisation of the P2P function and systems, acquisition or mergers also creates a higher vulnerability to duplicates, errors and fraud. When systems are being configured and resources are stretched, errors and omissions occur, processes take time to adapt and this allows sophisticated fraudsters to target these types of transformation projects.
Missed historical data creating risk
As migration projects typically copy only open transactions to the new system – historical transactions seen as being of little value – transaction history can be lost. Spotting irregularities relies on comparing transactions with historical data so that the validation of duplicate payments is hindered.
During ERP migrations the Master Supplier File (MSF) is frequently left untouched and copied in its entirety from the old to the new system. This creates heightened risks as supplier reference changes in the new ERP’s MSF make historical look-ups impossible and the opportunity to remove unused, out-of-date and duplicate suppliers – a hotbed for fraud – is removed.
Particularly at a time like right now, it’s crucial that organisations are able to take action in recovering missed payment errors.
Internal planned attacks
Over the past few years, there has been no shortage of stories about internal company fraud or senior finance professionals being tried in court for finance fraud. While only a small proportion of these incidences become public knowledge, as organisations fight to keep reputational damage at bay, it’s essential that companies place finance fraud high up on the corporate radar in order to protect against these threats.
According to the KPMG Fraud Barometer, there was a six-fold increase in the number of alleged procurement frauds appearing in court in 2019, usually involving fake invoices. Six cases worth over £16 million appeared in court in 2019 compared to £2.9 million in 2018.
The individuals and groups who are deceiving businesses to gain payments, usually gain some inside knowledge of the processes or systems to enable them to set up fraudulent suppliers and divert funds to their accounts. They are sophisticated and plan their attacks.
The biggest risk factor when it comes to ERP fraud is allowing users to access parts of the system that they shouldn’t be able to see, thereby enabling them to commit fraud in a variety of ways.
The most common type is the dummy company fraud, where a user sets up a false supplier, processes fictitious orders and invoices, and pays for goods or services that are never received. This is surprisingly easy to perform for a user with a little too much access. But there are many other forms of deception, including supplier bank account changes, inventory manipulation and unauthorised changes to payroll data. Proper control measures can mitigate these vulnerabilities to a large extent.
Nobody wants to believe that they are at risk of fraud, that their processes, systems and governance cannot safeguard their profits, however, invoice fraud is becoming a lucrative industry. Today’s finance leaders need help to keep ahead of the threat in order to protect and retain cash – the number one priority.
The UK Property recovery has begun
By Jamie Johnson is the CEO of FJP Investment,
The UK property sector will be integral to the country’s economic recovery from the direct and indirect effects of COVID-19. The Government certainly believes as much, with Chancellor Rishi Sunak implementing a series of sweeping changes to support property transactions amidst the pandemic. Most recently, on July 6th, 2020, it was announced that the first £500,000 of all property sales are now entirely exempt from Stamp Duty Land Tax (SDLT); including buy-to-let properties and second homes.
This attempt at boosting stimulus in the market is understandable. The real estate market is a key driver of national productivity and a big attractor of foreign investment to the UK. Thankfully for the Government, this policy has already been shown to be going some way in unlocking the stagnant demand for property that has been held back by COVID-19 uncertainty.
The boost the market needed
Mere weeks after this tax break was introduced, property journalists were already reporting a mini-property market boom. The property listing site Rightmove recorded an incredible 75% year-on-year increase for the month of July and a 2.4% rise in the asking prices of new properties on the website when compared to March levels pre-lockdown.
Whilst it is still too early to gauge how actual transaction numbers have been affected, this is a huge indicator that the Government’s policy has, thus far, been a success. After months of property price decline and housing market inactivity due to contagion fears surrounding COVID-19, the slump has finally ended, and buyers now feel confident enough to close on purchases once again.
But this demand will not be spread across the UK entirely evenly, so it’s worth examining how the continued presence of COVID-19 in our lives is shifting priorities in the minds of prospective buyers.
Stable demand, popularity shifting
With the working from home revolution seeming like it’s here to stay, it’s understandable that many of the working professionals who have found themselves having to turn their living spaces into work spaces may seek larger properties further from their employer’s traditional office space.
The aforementioned Rightmove figures support this claim. The rise in interest of London properties was just 0.5%, far behind the national average. This would make a change from the traditionally London-focused drive of the nation’s housing market; especially if we consider that this change in buyer sentiment may spur investors to look to places other than the capital when deciding where to invest in new high-end developments in the future.
Sunny skies ahead
This imbuing of market activity is likely to push up house prices for the foreseeable future. This would certainty follow expert’s forecasts, as global estate agent Savills recently stood by their prediction of 15% general house price growth in the UK by 2024. They cited the inevitable return of the buyer demand we witnessed in January 2020 once the novel coronavirus was in retreat; and it largely seems like, in conjunction with the Government SDLT holiday, this is exactly what’s happening.
FJP Investment commissioned research earlier this year which supports this projection. We found that 43% of property investors weren’t planning on making any financial decisions until COVID-19 had been effectively contained. With the virus now in retreat, it seems like confidence has risen. As a result, both investors and buyers are returning to the market in droves. Nationwide’s House Price Index for July, for example, showed that house prices have increased by 1.7% month-on-month.
Of course, I must taper this optimism with the knowledge that a second spike in cases or virus mutation could well set this recovery off-course. In short, there are still plenty of unknowns to content with.
However, as it currently stands, it seems as through the Government’s SDLT tax break will successfully encourage buyers (and sellers) to push up housing market activity for the foreseeable future. I look forward to being to a part of the UK property renewal in the coming months, and for the housing sector to provide the impetus for a strong UK economic recovery more generally.
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