Trends in STOR reports over the last five years- FCA publishes data, we analyze....
The FCA recently published STOR (Suspicious Transaction Order Report) data over the last five years 2017 to 2021. Figure 1 illustrates the alerts based on asset class: commodities, equities, fixed income, and foreign exchange (FX). Further, it also classifies the alerts by the type of market abuse: insider dealings, market manipulation, and other factors. So, it provides what we believe is a very usable data set to analyze trends in STOR reporting.
As a reminder, suspicious transaction and order reports (STORs) relate to reports raised by investment firms to the FCA where there are ‘reasonable grounds’ to suspect it might be market abuse, such as insider dealing or market manipulation.
Equities: demonstrated a ‘V’-shaped trend as STORs rose by ~6.31% in 2018 from the previous year. However, this value would drop across the next two years – falling ~11.04% in 2019 and ~22.61% in 2020 (compared to the preceding years). The alerts then picked up in 2021, rising by ~20.79% YoY.
Fixed Income: experienced a surge in STORs in 2018, rising by ~60.89% from 2017. It then continued to increase by ~22.15% in 2019, before falling consecutively by ~21.66% in 2020 and ~30.55% in 2021.
Commodities: fell by ~33.33% in 2018, before surging by ~62.79% in 2019. The trend then showed a decline of ~24.29% in 2020 before rising marginally by ~4.72% in 2021.
Foreign Exchange (FX): rose by ~63.64% in 2018 and ~5.56% in 2019. Later declined by ~1.32% in 2020 and plunged by ~76% in 2021.
Overall, there was a general decline in STORs reported to the FCA (avg. of ~17.47%) across all four asset classes during the year 2020. This trend persisted into 2021, declining by an average of ~20.26% across all asset classes.
Across all asset classes; equities lead in number of STORs. Equities comprise ~91.12% of aggregate STORs over a five year period, followed by Fixed Income of ~5.58%, Commodities of ~2.20% and FX of ~1.10%.
Insider dealing appears to be the most common type of market abuse, responsible for ~86% of aggregate STORs recorded over the past five years. This is followed by market manipulation with a value of ~13.91% and others, valued at ~0.09% of aggregate alerts.
Market abuse during the Covid-19 pandemic
The economic shocks of the Covid-19 pandemic plunged several global markets into peril, inducing a period of unemployment, inflation and stagnancies in economic growth. Amidst this crisis, there was a dramatic increase in trading activity and volatility across a host of popular asset classes, particularly at the start of the crisis, in most cases leading to a surge in alert volumes across the board. The FCA maintains that during the early months of the pandemic, records showed a reduction in the number of STORs logged, while maintaining the quality of STORs and a reasonable volume of ‘missing STORs’ compared to their own surveillance of the market.
The trend in STORs had already exhibited a marginal decline from 2018 to 2019, when it declined by ~7.95% YoY. This declined by a further ~22.29% in 2020, which corroborates the FCA’s statement of a decline in STORs during the early months of the pandemic. Despite this sentiment, the number of STORs inclined upwards, recovering by ~14.91% in 2021.
The decline was observed despite a ~34% increase in transaction reports during 2020 (FCA). The main suspect, as FCA executive director of enforcement and market oversight Mark Steward mentioned, was a temporary effect due to reduction in market abuse opportunities in a pandemic-focused market as well as new compliance challenges arising from everyone largely working from home. This could be the main reason why STORs exhibited an increase to normal levels in 2021, as this trend poses a strong correlation to the UK’s sentiment towards employees heading back to the workplace.
Another reason for this decline could be a decrease in reported suspicious trades which is some firms seizing the pandemic as an opportunity to deliberately not raise STORs with the FCA. Regulators suspect that despite the drop in STORs received during the pandemic, market abuse did not decrease. Markets were experiencing very high volatility and significant trading volumes as traders seized every opportunity that presented itself, potentially allowing for some firms who saw the chaos of the initial lockdown as an opportunity to mis-report.
Market surveillance continues to be a hot topic on the regulatory agenda.
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Contributors: Chavin Munasinghe (Associate) and Prash Fernando (Lead Consultant)