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Seven sins of finance have been repeated for centuries, as fraudsters carry out the same tricks to rip off investors despite tightening levels of regulatory scrutiny and advances in technology. From gilt investors spreading false news that Napoleon Bonaparte had been killed in 1814 to two authors of the Daily Mirror’s “City Slickers” column trading in shares they tipped almost two centuries later, there are a “limited number of behaviour patterns” that keep being repeated in financial fraud. This is the conclusion of a study carried out on 390 cases of financial market misconduct stretching back 225 years by the body established to help clean up the City of London after a string of financial scandals. The Fixed Income, Currencies and Commodities Markets Standards Board, which was set up three years ago by the Bank of England and Treasury in response to the Libor interest rate and foreign exchange rigging scandals, said its research could improve systems and controls to catch bad actors in future. Mark Carney, governor of the Bank of England, said the review was “fundamental to identifying the root causes of misconduct and to finding ways to reinforce the collective memory of the market about what constitutes acceptable conduct and practice”. The seven broad types of financial misconduct it identified were: price manipulation, inside information, circular trading, reference price influence, collusion and information sharing, improper order handling and misleading customers. The review found that patterns of bad behaviour had been repeated across national borders and asset classes, as well as being adapted to new technologies. “Technology is not new — it has been a feature of markets for years, and as such there is corresponding body of evidence of conduct malpractice in the screen-based trading environment,” the review said. “These behaviours are not new — they are known behaviours that have adapted to new media.” In the field of price manipulation, the research found how the media by which false information is published has changed, but the techniques remain the same. In 1814, Charles de Berenger colluded with Sir Thomas Cochrane and six others to accumulate a large position in UK gilts before he appeared in Dover disguised as a Bourbon officer and reported that Napoleon had been killed, sending a letter to the Admiralty in London to that effect and staging a parade across London Bridge to proclaim an allied victory. UK government bonds rose on the news and they then sold their holdings for a profit. Some 199 years later, the US Securities and Exchange Commission alleged that a fabricated Twitter account was used to spread false and negative news about Audience, a technology company, and Sarepta Therapeutics, a biotech company. The report also found evidence that bad behaviour in non-screen-based markets can shift to other asset classes that are already platform traded and vice versa. “Most behavioural clusters are asset class neutral — they can be undertaken in any asset class,” it said. For example, it cited the case of Optiver, which the US Commodity Futures Trading Commission found in 2012 to have designed a software program called “Hammer” to ensure its orders for crude oil, heating oil and New York harbour gasoline futures were first in the queue and drove prices in its favour on the Globex trading platform. This technique of manipulating prices by “banging the close” was repeated a few years later by Athena Capital Research, a high-frequency trading company, which the SEC alleged in 2014 had developed algorithms called “Gravy” that helped it to make large sales or purchases of shares in the few seconds before the market close to drive prices higher or lower.
Source: The Financial Times