Market Manipulation Strategy Quiz

Mr. Coscia manipulated the market by placing large buy and sell orders, followed by smaller orders to profit from the price movements.
Coscia's large buy orders would increase the price of the Brent contracts.
Coscia would then place smaller sell orders at a higher price to generate a profit.
After placing large sell orders, Mr. Coscia would place smaller buy orders at a lower price to profit from the price decrease.

Coscia's large orders significantly impacted the market, making up a large proportion of the market depth.
His large buy orders made up 64%, 77%, and 87% of all the buy orders placed in the market.
These orders caused the mid-price and the bid/offer spread to move because they represent a significant portion of the market depth.
This strategy allowed Coscia to create an artificial price movement and profit from it.

The example shows Mr. Coscia buying 17 lots of Brent contracts at 115.86.
He followed this with 3 large sell orders at 115.88, 115.88 and 115.87.
Then he sold 17 lots of Brent contracts at 115.88.
This strategy generated a profit of USD 340 for Mr. Coscia.
The example highlights Coscia's strategy to manipulate the market and profit from price changes.

Autonomous AI agents can make it difficult to detect wrongdoing because they can break the chain of causation between a harmful act and the alleged damage.
It can also be difficult to determine negligence since the humans who created and maintain the AI may not be able to predict how it will behave.

Authorities are challenged by difficulties in assessing liability for AI misconduct.
There is a need to understand each individual's contribution to the problematic AI behavior in order to determine responsibility.
It is difficult to determine whether AI misconduct is an unintended or intended consequence of human intent or an autonomous AI decision.
The difficulty in explaining AI decisions (lack of explainability) presents legal and technical challenges for compliance.

Improving the explainability of algorithmic trading systems (increased transparency).
Testing and validation of algorithms (with or without pre-approval), and ex-ante surveillance.
Ex-post surveillance at trading venue level (e.g. circuit breaker).
Ensuring traceability of AI decisions back to a human.

MAR (Market Abuse Regulation) applies to financial instruments traded on regulated venues (RM, MTF and OTF) or those having an impact on instruments traded on those venues.
MAR applies to any transaction, order or behavior related to those instruments, even if not taking place on a trading venue.
Rules apply to actions and omissions within or outside the EU.
SME’s (Small and Medium Enterprises) on Growth Markets are exempt under specific conditions, but can be requested to provide information (art. 18.6 MAR).
Market soundings are legal.
Market soundings (defined as communication of information prior to the announcement of a transaction to gauge potential investor interest in the context of a market transaction) are legal.
Market-sounders must consider whether the sounding involves disclosure of inside information, and maintain written records of their analysis, which should be provided to the competent authority upon request.
The ability to conduct market soundings is deemed important for the proper functioning of financial markets (MAR Recital 32).
MAR Recital 33 lists types of market soundings:
- Sell-side firm gauges potential investor interest.
- An issuer intends to announce a debt issuance.
- Sell-side firm seeks to sell a large amount of securities.

Enforcement is vital because market abuse is typically a low-probability (of detection) and high-reward event.
Sanctions need to be strong enough to be a deterrent.
The US historically has a strong link with criminal sanctions, while the EU adopted criminal sanctions in the 2014 MAD for natural persons and companies.
Maximum term of imprisonment of at least 4 years.
Disqualification from commercial activities.

The market abuse regime and enforcement are supported by the transaction reporting regime imposed by MiFID II (Title IV, MiFIR).
Investment firms must report complete and accurate details of transactions in financial instruments to the competent authority as quickly as possible, and no later than the close of the following working day.
Reports are shared with the NCA (National Competent Authorities) of the most relevant market.
Operators of trading venues are required to report details of transactions executed on their platform by firms not subject to the Regulation.
Reporting bodies are investment firms themselves, trading venues, and authorized reporting mechanisms (ARMs).
Harmonization of formats among NCAs is taking place.

‘Benchmark’ refers to an index used to determine the amount payable under financial instruments or contracts, or the value of a financial instrument.
Benchmark manipulation can affect hundreds of trillions of euros of financial transactions, as the final price or value depends on the index they reference.