Suspicious trading around the time of public announcements was not picked up by retail broker Interactive Brokers, landing its UK business a £1m fine for poor surveillance of potential insider dealing.
Two highly profitable “contract for difference” trades that potentially used inside information slipped through Interactive’s monitoring, the Financial Conduct Authority said on Thursday. It fined the company for weak market-abuse controls and “serious and systemic weaknesses within its procedures”.
A further suspicious trade around the same time as a Regulatory News Service announcement was picked up but not escalated and therefore not investigated by Interactive Brokers UK, the FCA said.
The fine — one of the largest against a retail broker for failings of market-abuse surveillance — comes as the FCA and European regulators take a tougher line on CFDs, with new rules expected early this year.
The products track the price of an underlying asset and allow customer to borrow to increase their bets, pumping up potential returns or losses.
But general market abuse is also a focus of the FCA. Its most recent large insider dealing case — Tabernula — was two years ago. Securing five convictions, including a former Moore Capital trader and an ex-Deutsche Bank managing director, it cost £14m and took nearly eight years to pursue.
On the suspicious Interactive trades, one customer made a net profit of £440,000 in three days, while another netted £870,000.
In the third trade — which was picked up but not escalated — the customer netted more than £1m after buying contracts equivalent to half a million shares in a stock that jumped 22 per cent shortly after. The customer had not traded that stock for at least a year before the trade, the FCA said.
The FCA declined to comment on whether it was investigating the CFD trades, which took place between November and December 2014.
According to the most recent FCA statistics, details of one in five corporate deals leak out. Before the watchdog started to prosecute in 2009, suspicious transactions preceded 30 per cent of takeover announcements.
The regulator said Interactive’s UK business had outsourced surveillance of its trades to a US subsidiary, which failed to properly design, test or implement systems to monitor for potential market abuse. It also failed to provide “effective oversight” of how the US team reviewed any monitoring reports, or to ensure the team was sufficiently trained.
“IBUK’s systems were inadequate and ineffective in the face of potentially suspicious transactions,” said Mark Steward, the FCA’s director of enforcement and market oversight. “They fell below the appropriate standards and exposed counterparties and the market to risks they did not bargain for.”
Interactive Brokers said it had “fully co-operated with the inquiry” but disagreed with the FCA’s findings. On appeal, the penalty was reduced by 50 per cent to £1m, the company said.
“Since the period of the breaches, IB UK has implemented significant improvements to its systems and controls for detecting and reporting potential insider dealing,” it said.