U.K. lawyers are warning that market abuse such as insider trading will be more prevalent and more difficult to control during the current market turmoil than in previous crises. Professionals fear the increasing popularity of spread betting and the almost unprecedented volatility of stock prices will create greater temptation, and are concerned that compliance department cut-backs will reduce financial institutions' ability to prevent and spot violations.
In the U.K., gamblers can bet on whether shares will go up or down and earn profits or lose money in increments depending on how much the stock moves. For example, someone might bet that a share will go up and win £10 ($18) for every 1p it goes up, or lose £10 for every penny if it falls. Although spread betting is legal, it is illegal to manipulate the outcome or to bet when privy to insider information.
Periods of market instability can push traders to resort to illegal methods, lawyers warned. "In a bad market everyone is under far more pressure to make profits so there is the temptation to use whatever means necessary," said Oliver Kerridge, associate with Baker & McKenzie in London.
Chris Brennan, associate with Barlow Lyde & Gilbert in London, said that when financial markets are in turmoil it can become harder for compliance officers to control the flow of inside information within their firms. If a financial institution is facing problems--as many are--more people become involved. It can be hard for compliance to keep tabs on all those involved in discussions, Brennan said.
The development of new forms of electronic communication in recent years has made the spread of information more difficult to control. Regulators in the U.K. and the U.S. are already looking into alleged rumor-mongering that some have blamed for sharp falls in the share price of some financial institutions, notably Lehman Brothers and Goldman Sachs.
Hector Sants, CEO of the U.K. Financial Services Authority, in a speech late last month warned firms to be wary of weakening their controls. "While I acknowledge that the current environment is causing many firms to look at cost controls, management needs to carefully consider any headcount reduction exercise that could compromise essential functions, especially those in roles such as operations, risk and compliance."
--Jon Young