BSM Market Surveillance - BSM Supervisão de Mercados€¦ · BSM market surveillance: Cases of market manipulation and insider trading 13 Case 2 Artificial conditions and market

BSM market surveillance: Cases of market manipulation and insider trading 1 Restricted Confidential Confidential Internal Use Public

7th IOSCO AMCC Training Seminar

BSM Market Surveillance:

cases of market manipulation and insider trading

X

Tokyo, April 2014

BSM market surveillance: Cases of market manipulation and insider trading 2

AGENDA

Regulatory framework

Case 1 – Market manipulation

Case 2 – Artificial conditions and market manipulation

Case 3 – Artificial conditions by offers (layering)

Case 4 – Insider trading



• IOSCO Objectives and Principles of Securities Regulation

– Principles for Secondary Markets

Principle 36: Regulation should be designed to detect and deter manipulation

and other unfair trading practices.



• The Brazilian regulatory framework

– Law 6385/1976

Makes provisions on the securities market and establishes the Brazilian

Securities Commission (CVM)

Provides that exchanges are auxiliary regulatory entities responsible

for surveilling market activities and market participants

– CVM Instruction 461/2007

Regulates and governs regulated securities markets and makes provisions on

the formation, organization, operation and extinction of stock exchanges,

commodities exchanges, futures exchanges and organized over-the-counter

markets



• The Brazilian regulatory framework (cont.)

– CVM Instruction 8/1979

I - Managers and stockholders of public companies, intermediaries, and other

participants in the securities market are prohibited from creating artificial conditions

of demand, supply, or price of securities, from engaging in price manipulation, in the

execution of fraudulent operations, and in the use of unfair practices.

II - For the purposes of this Instruction, the following concepts shall apply:

– a) artificial demand, supply or price conditions of securities are those created as a result of

trades performed by participants or intermediaries that, due to fraudulent action or intentional

omission, cause direct or indirect alterations in the flow of purchase or sale orders for securities;

– b) price manipulation on the securities market is the utilization of any process or stratagem

intended directly or indirectly to raise, maintain, or lower the quotation of any security, inducing

third parties to purchase and sell it;

– c) fraudulent trading on the securities market is that which uses deceptions or stratagems to

induce or maintain third parties to commit errors, for the purposes of obtaining illicit equity gains

for the parties involved in the operation, the intermediaries or third parties;

– d) unfair practice on the securities market is that which directly or indirectly results, effectively

or potentially, in treatment for any of the parties in negotiations involving securities, which

places them in an improper position of imbalance or inequality with respect to the other

participants in the transaction.



• The Brazilian regulatory framework (cont.)

– BM&FBOVESPA rules


AGENDA







Case 1 Market manipulation

• Manipulation by uncovered sell position at the closing to reduce the price in the day before the increase

of representativeness of the stock in the Bovespa index (increase in manipulation impact on Ibovespa)

• Manipulator was long in Ibovespa futures and won with the settlement

• There was a failure to delivery in half of the uncovered sell positions

• Manipulator and beneficiary is an institution related to the broker

-

200.000.000,00

400.000.000,00

600.000.000,00

800.000.000,00

1.000.000.000,00

1.200.000.000,00

1.400.000.000,00

1.600.000.000,00

1.800.000.000,00

0,10

0,15

0,20

0,25

0,30

0,35

0,40

0,45

0,50

0,55

0,60

10

:06

10

:43

10

:58

11

:13

11

:28

11

:43

11

:58

12

:13

12

:28

12

:43

12

:58

13

:13

13

:37

13

:52

14

:13

14

:28

14

:43

14

:58

15

:13

15

:28

15

:43

15

:58

16

:13

16

:28

16

:43

17

:59

10

:47

11

:02

11

:17

11

:32

12

:06

12

:21

12

:36

12

:51

13

:06

13

:26

13

:41

13

:56

14

:11

14

:26

14

:41

14

:56

15

:11

15

:26

15

:41

15

:56

16

:25

16

:40

17

:41

17

:57

30/08/2013 02/09/2013

Va

lue

(R

$)

Pri

ce

(R

$)

Volume Preço

% price of -41,5%

34,4% of the selling value was traded

by clients of the same broker.

Day 1 Day 2

1 -> Last price before the closing

2 -> Closing price

3 -> Opening price

• Result = + R$ 10,6 millions = + R$ 20,7 millions (Future) - R$ 10,1 millions (spot)


Case 1 Layering

• BSM Action

– Open of an Administrative Proceeding


AGENDA







Case 2 Artificial conditions and market manipulation

366

367

368

369

370

371

372

3731

1:5

01

1:5

51

1:5

71

1:5

81

1:5

91

1:5

91

1:5

91

1:5

91

2:0

11

2:0

21

2:0

21

2:0

51

2:1

01

2:1

51

2:1

81

2:1

91

2:2

01

2:2

01

2:2

11

2:2

31

2:2

71

2:2

81

2:3

01

2:3

11

2:3

11

2:3

11

2:3

11

2:3

21

2:3

41

2:3

71

2:3

71

2:4

21

2:4

21

2:4

31

2:4

51

2:5

01

2:5

31

2:5

31

2:5

51

2:5

51

2:5

51

2:5

51

2:5

7

Price evolution between CFO tradings

Cotação Cotação da Companhia CFO

Selling trades of the company are

essencial to the price decreasing in the

moment that CFO will buy against the

Price R

$

Buying trades of the company are

essencial to the price increasing

in the moment that CFO will sell

Company's performance Price

Buying trades of the

company help to rise the



• CFO is partner and authorized to give orders in name of the companies from the same economic group

• All trading (day trading) are executed by the same trade

• Period: 55 days during 4 months

Manipulador interfere no book de ofertas, lançando ofertas de venda a preços cada vez menores

Quando aparece uma oferta de venda a preço que ele considera interessante em lote que ele considera adequado ele executa a compra e cancela as ofertas de venda

CFO

Profit R$ 103 mil

Trade

Profit R$ 150 mil

Trade’s wife

Profit R$ 112 mil

day-trades Loss R$ 1 million

Economic

Group



• BSM’s Action

– Administrative Proceeding iniciated in 2012

Settlement Agreement: R$ 1,2 millions

Judgement for violations related to ICVM 301


AGENDA







Case 3 Artificial conditions by offers (layering)

• Manipulator raised the bid price (from 12,56 to 12,60) to sell;

• The steps created in the bid side attract buyers and the manipulator alternate to the other side of the

book to sell;

• There are trading in which the manipulator is the buyer and the selller to clean the book and achieve the

attracted buyer;

• After the trade, manipulator cancelled the rest of the bid offers (artificial offers).

Ask offers Bid offers


• Manipulator repeat the strategy on the other side of the book to buy at lower price and obtain profit in day

trading

• Manipulator executes the strategy in 45 days, with total of 69.600 tradings

• Total profit of the strategy: R$106.000,00


Ask offers Bid offers



• BSM Action

– Accusation Term in process


AGENDA







Case 3 Insider trading

• Non expected decision from Banco Central do Brasil reducing basic interest rate (SELIC)

• Investor trading outside his pattern (sells DI options (future interest rate contract)) with profit of R$ 217

mil

August 29 and 31 – Investor sells 12,000 options na

average price R$ 18,11, after this the options lost its value.


Case 3 Insider trading

• BSM’s action

– Investigatiion sent to CVM


Contact

Marcelo Deschamps D’Alvarenga

Head of International Affairs

(+55 11) 2565-4763

[email protected]

mailto:[email protected]



Documents

BSM Market Surveillance - BSM Supervisão de Mercados€¦ · BSM market surveillance: Cases of market manipulation and insider trading 13 Case 2 Artificial conditions and market