Rulebooks: Contents

Rulebooks
Mainboard Rules
Catalist Rules
SGX-ST Rules
Definitions and Interpretation
Section A — General
Section B — Market Participants
Section C — Market Structure
Section D — Regulatory Framework
Section E — Other Business Activities
Section F — Transitional Provisions
Directives
Practice Notes
Practice Note 13.8.1 — Market Manipulation and False Market
Schedules
CDP Clearing Rules
DVP Rules
CDP Depository Rules
Futures Trading Rules
SGX-DC Clearing Rules
SIAC DT Arbitration Rules
SIAC DC Arbitration Rules
Rule Amendments

  Versions
(3 versions)
 

Practice Note 13.8.1 — Market Manipulation and False Market

Issue Date Cross Reference Enquiries
Amended on
3 April 2008 and 7 July 2015.
Rules 13.8.113.8.3 Please contact Enforcement:—

E-Mail Address: enforcement@sgx.com

1 Introduction

1.1 Public confidence in a fair and orderly market, one that reflects the forces of genuine supply and demand, enhances its liquidity and efficiency. Improper conduct which gives a false or misleading impression of trading activity, price movements or market information leads to a reduction in market efficiency and confidence. SGX-ST seeks to ensure that its markets are fair and orderly and free of manipulative trading.
1.2 There are rules regulating trading activity in SGX-ST Rules and the Securities and Futures Act. Trading Members and Trading Representatives must ensure that their trading is conducted in accordance with SGX-ST Rules and the Securities and Futures Act.

2 Market Manipulation and False Market

2.1 Rule 13.8.1 says, A Trading Member or a Trading Representative must not engage in, or knowingly act with any other person in, any act or practice that will or is likely to:—
(1) create a false or misleading appearance of active trading in any securities or Futures Contracts; or
(2) lead to a false market in respect of any securities or Futures Contracts. For avoidance of doubt, a false market includes a market in which:—
(a) information is false, exaggerated or tendentious;
(b) contrived factors are in evidence, such as buyers and sellers acting in collaboration to bring about artificial market prices; or
(c) manipulative or fictitious orders, transactions or other devices have been employed.
2.2 In broad terms, market manipulation involves intentional interference with the free forces of supply and demand to deceive or defraud investors, or for some other ulterior purpose.
2.3 Rule 13.8.1 is concerned with the effect or likely effect of an order or a transaction, and involves an objective assessment of whether a false or misleading appearance, or false market, has been created. Whether an activity is "false or misleading" will depend on circumstances in each case. The Rule does not prevent Trading Members and Trading Representatives from carrying out legitimate trading strategies which reflect the forces of genuine supply and demand. However, Trading Members and Trading Representatives must do so bearing in mind their obligations to the market, and with an appropriate degree of care.
2.4 Although Trading Members and Trading Representatives must carry out their customers' instructions, a Trading Member or Trading Representative should not accept a customer's instructions blindly, but should exercise judgment in each case.
2.5 Naturally, some orders or transactions will have an impact on the market. They are not prohibited if there is a legitimate commercial rationale and the order or transaction is executed in a proper manner.
2.6 Rule 13.8.2 identifies the factors that Trading Members and Trading Representatives should take into account when considering the circumstances of an order or a transaction.

3 Guidance on Rule 13.8.2

3.1
3.1.1 Rule 13.8.2(1): Whether the Proposed Transaction Will be Inconsistent with the History of, or Recent Trading, in the Security or Futures Contract.

Trading Members and Trading Representatives would generally be familiar with the patterns of trading in each security or Futures Contract. They are therefore expected to exercise judgment, based on their experience and knowledge of trading in the security or Futures Contract, in assessing the likely impact of a proposed transaction on the market for a security or Futures Contract.

The Rule does not prevent a Trading Member or Trading Representative from executing an order simply because it will have an impact on the market for, or price of, a security or Futures Contract.
3.1.2 Rule 13.8.2(2): Whether the Proposed Transaction will or May Cause or Contribute to a Material Change in the Market for or the Price of the Security or Futures Contract, and Whether the Person Involved or Another Person with Whom the First Person is Collaborating May Directly or Indirectly Benefit From Alterations in the Market Place or Price

In the absence of a good reason to buy or sell quickly, customers generally want to obtain the best price. A Trading Member or Trading Representative who receives an order that would materially alter the market for, or price of, the security or Futures Contract, should consider whether it is genuine or manipulative.

Trading Members and Trading Representatives must also know their customers. Orders placed by a customer or a related party of that customer, who may have an interest in creating a material change in the market for, or price of, a particular security or Futures Contract, should be closely examined.

Examples
(1) Orders placed by a large holder of a particular security or Futures Contract who may have an interest in inflating the value of that holding (e.g. window dressing for investment performance purposes), or decreasing the price of the security or Futures Contract (e.g. as a precursor to a takeover bid or for purposes which include lowering a conversion price).
(2) Buying during the period of a rights issue by an underwriter, sub-underwriter or any other party which increases or maintains the price of the underlying security may include, as a purpose, inducing others to take up their rights entitlement under the issue.
3.1.3 Rule 13.8.2(3): Whether the Proposed Transaction Involves the Placing of Multiple Buy and Sell Orders at Various Prices Higher or Lower than the Market Price, or the Placing of Buy and Sell Orders Which Give the Appearance of Increased Volume.

A Trading Member or Trading Representative should not make large entries above or below the prevailing spread to facilitate filling an order on the other side of the market. The placing of buy (sell) orders at various price steps below (above) the market may create a false or misleading appearance that the entries are on behalf of genuine buyers (sellers). The layering of orders also translates into a change in the depth screen and may mislead market participants with respect to interest in the counter.
3.1.4 Rule 13.8.2(4): Whether the Proposed Transaction will Coincide with or is Likely to Influence the Calculation of Reference Prices, Settlement Prices and Valuations.

A Trading Member or Trading Representative should consider carefully any orders placed with instructions to execute them at or near the close of trading, particularly if a price target is set. A Trading Member or Trading Representative should also be alert to orders placed near the close on the last trading day of the month, quarter or year, or on the expiry dates of options, warrants or Futures Contracts, which will move the price when executed.

A customer who, to the knowledge of the Trading Member or Trading Representative, declines the opportunity to obtain a better price during the day and prefers to pay a higher (lower) price near the close should be queried as to the strategy. This is important if the order is to buy or sell a small volume of the security or Futures Contract, which is likely to move the price and possibly fix the closing price. Further, if the Trading Member or Trading

Representative received a series of similar orders over a number of days, each of which generates a price movement near the close of trading, the Trading Member or Trading Representative should be satisfied that the customer is not attempting to create a false or misleading appearance with respect to the price of the security or Futures Contract.

Examples
(1) A fund manager's quarterly performance will improve if the valuation of his portfolio at the end of the quarter in question is higher. By placing a large order to buy relatively illiquid securities and/or Futures Contracts, which are also components of his portfolio, to be executed at or just before the close, his purpose might be to distort the price in his favour.
(2) The expiry of futures contracts may require a timed unwinding of the countervailing security position. In these circumstances, price impact in some securities may be inevitable, particularly in less liquid securities. However, a Trading Member or Trading Representative should be alert to a customer seeking to cause unnecessary price impact to improperly generate a profit or move the index.
3.1.5 Rule 13.8.2(5): Whether Parties Involved in the Proposed Transaction are Connected.

A concern here might arise if the security or Futures Contract is held in the name of a colluding party but the market risk actually remains with the seller. There may effectively be no change in beneficial interest.
3.1.6 Rule 13.8.2(6): Whether the Buy and Sell Orders are to be Entered at About the Same Time, for About the Same Price and Quantity (Excluding Direct Business).

The time proximity of orders and the fact that they are for about the same price (particularly if the price is out-of-range) and quantity may suggest that the transaction is pre-arranged. Pre-arranged transactions have the effect of creating a misleading appearance of active trading, or improperly excluding other market participants from the transaction since the first bid or offer was not adequately exposed to the market. The execution of crossings or transactions between the same parties for the same volumes, which are subsequently reversed at the same prices, also raises questions whether the transactions involve a change in beneficial ownership, or are for rollover of trades to extend settlement, or for a purpose of engaging in a circular trading scheme to create the impression of turnover.
3.1.7 Rule 13.8.2(7): Whether the Proposed Transaction Will or May Cause the Price of the Security or Futures Contract to Increase or Decrease, but Following Which the Price is Likely to Immediately Return to About its Previous Level.

The key question in this area is whether there appears to be any logical trading pattern to the price and volume of the security or Futures Contract, or whether it seems erratic. Trading is manipulative if it is intended to move the price of the security or Futures Contract.
3.1.8 Rule 13.8.2(8): Whether a Proposed Bid (Offer) is Higher (Lower) than the Previous Bid (Offer) but is to be Removed from the Market Before it is Executed.

This could indicate that the order is not genuine, especially where a distinctive pattern of such orders is observed. At the time the bid (offer) was made, the Trading Member or Trading Representative did not intend to buy (sell), but intended that the bid (offer) would not trade and would be cancelled. Sometimes, such orders are entered to induce buyers (sellers) into the market to facilitate the filling of an order on the other side of the market.
3.1.9 Rule 13.8.2(9): Whether the Volume or Size of the Proposed Transaction is Excessive Relative to Reasonable Expectations of the Depth and Liquidity of the Market at the Time.

This Rule does not restrict Trading Members and Trading Representatives trading significant volumes where there is a legitimate purpose for the transaction and where the transaction is executed in a proper manner. However, trading significant volumes with the purpose of controlling the price of a security or Futures Contract will amount to manipulative trading.

Example

A Trading Representative purchased substantial volume in a thinly traded counter, which accounted for a large proportion of the market volume, to establish a predetermined price. Sometimes, this may be followed by up-ticking the bid despite the absence of bona fide investor demand for the security or Futures Contract.
3.1.10 Rule 13.8.2(10): Whether the Proposed Buy (Sell) Order is Likely to Trade with the Entire Best Offer (Bid) Volume and Part of the Offer (Bid) at the Next Price Level.

If a customer regularly buys (sells) on the up-tick (down-tick) in the face of consistent selling (buying) pressure, the Trading Member or Trading Representative should query whether the customer is a bona fide purchaser (seller). Repetitive orders to clear the best offer (bid) volume, particularly within a short time, suggest that the Trading Member or Trading Representative might be attempting to break the market. The trading spikes or troughs were meant to excite the market and attract spectators to join in.
3.1.11 Rule 13.8.2(11): Whether the Proposed Buy (Sell) Order Forms Part of a Series of Orders that Successively and Consistently Increase (Decrease) the Price of the Security or Futures Contract.

If a customer places a sell order well above the best ask and one or more buy orders which would increase the price towards the customer's ask price, a Trading Member or Trading Representative should query the customer as to the strategy. It may be that the buy orders are intended to get the price running and facilitate the sale at the higher price. Illiquid securities or Futures Contract, in particular, are susceptible to this type of improper trading.
3.1.12 Rule 13.8.2(12): Whether There Appears to be a Legitimate Commercial Reason for the Proposed Transaction.

Many orders for legitimate commercial reasons can change the market for, or price of, a security or Futures Contract when executed. Such orders are acceptable despite the price impact, but the Trading Member or Trading Representative must execute the order in an appropriate manner, bearing in mind its or his obligations.

Examples
(1) A Trading Member conducting index arbitrage as principal and entering orders in an illiquid security or Futures Contract may have a material impact on the price of some securities or Futures Contracts, even with small orders. Index arbitrage orders are a legitimate commercial reason for trading, but the Trading Member must exercise sufficient care to ensure that the order did not result in a false or misleading appearance with respect to the price of a security or Futures Contract.
(2) A Trading Representative accepting orders from a customer seeking to replicate an index at a time when one or more of the security or Futures Contract are being included or excluded from the relevant index, or when the size of the portfolio is being increased or decreased, should consider the impact the orders may have. If the Trading Representative attempts to execute a large proportion of the order during the Pre-Close phase, having ignored opportunities earlier in the day, and the order has a material impact on the closing price, it may result in allegations that the Trading Representative created a false or misleading appearance with respect to the price of that security or Futures Contract.
(3) A Trading Member or Trading Representative trading as principal to hedge an exposure should be alert to the impact its trading may have on the market for, or price of, a security or Futures Contract.

4 Guidance on SGX-ST Rule 13.8.3

4.1 Rule 13.8.3 says,

A Trading Member or a Trading Representative must not enter a buy order or a sell order on the Trading System if there is an existing opposite order from that same Trading Member or Trading Representative in the same security or Futures Contract for the same price. This Rule does not apply if:
(1) the Trading Member or Trading Representative knows or ought reasonably knows that the orders are for different beneficial owners;
(2) the order is a type expressly permitted in a practice note published from time to time by SGX-ST as having a legitimate commercial reason and which is unlikely to create a false market; or
(3) the Trading Member or Trading Representative can otherwise establish that the purpose for which the order was made was not to create a false market.
4.2 Pursuant to Rule 13.8.3(2), orders entered under the following circumstances will be permitted:—
(1) orders from a fund manager whose instructions are intended to switch the security or Futures Contract from one sub-account to another for legitimate commercial reasons.
(2) orders from an affiliate overseas, acting on behalf of different beneficial owners, and the trades will be booked out eventually to these beneficial owners.

5 Conclusion

5.1 Manipulative trading may be inferred from circumstantial evidence, such as an unusual pattern of trading, coupled with a person's interest in affecting trading in the security or Futures Contract. Trading Members and Trading Representatives may not always know if a customer has a particular interest in a security or Futures Contract or what it may be. However, a Trading Member or Trading Representative needs to be able to show that, taking into account the circumstances of the order, it should not have reasonably suspected that the purpose of the trading was to create a false or misleading appearance, or false market. It is important that a Trading Member or Trading Representative who receives an unusual order is able to establish that it or he has made due enquiries and is satisfied as to the reason for the trading.

Amended on 25 October 2012.