What is Market Abuse?

Market abuse is a type of financial crime that results from attempts to illegally manipulate a financial market, or the use of insider information. The prevention of market abuse is important, as it creates a level playing field for all investors. In many regions, market abuse is a crime that can result in jail time and fines.

One of the biggest contributors to market abuse is insider trading. This type of crime occurs when a person with specific insider information about the market buys or sells shares in order to profit off the information or to avoid losses. If an employee at a company gets wind of a takeover, for instance, he or she may use this information to sell shares in the company about to be taken. This is considered unethical and often illegal, because the person buying the shares might not have done so if he or she knew about the takeover.

In order for insider trading to qualify as market abuse, it must be shown that the information used to make the trades was not publicly available. For instance, a person selling shares for a company about to be taken over is probably not going to be accused of insider trading if he sells them after the takeover is publicly announced. After a deal is publicly announced, ignorance of the deal is no longer considered to be mitigating. Additionally, insider trading accusations are usually reserved only for upper-level officers of a company, or those that own a significant portion of the equity of a company.

The second major category of market abuse is also called illegal manipulation. There are a variety of ways to illegally manipulate the financial market for gain, but many are extremely difficult to prove in court. Illegal manipulation is sometimes considered restraint of trade, since it generally aims to alter the natural flow of the market through misinformation and distortion. This type of market abuse is heavily regulated against by both US and European market directives and anti-fraud laws.

Manipulative forms of market abuse often revolve around untrue or misleading information and actions. For instance, if a person sends out an email to stockholders about a planned merger that he or she knows to be false and untrue, this information could artificially manipulate the market as stockholders react to the fake information. Intentionally manipulative trading behavior can also be construed as market abuse, such as buying an enormous amount of shares in a company with the express intention of driving up the price. Since so many of these manipulative crimes are based on intent, they often prove very difficult to successfully prosecute despite strict regulations.