Shearman & Sterling LLP | FinReg | UK Conduct Regulator Publishes New Measure of Market Cleanliness
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  • UK Conduct Regulator Publishes New Measure of Market Cleanliness

    The U.K.'s Financial Conduct Authority has published details of its Abnormal Trading Volume ratio, a new metric by which the FCA intends to measure "market cleanliness". Market cleanliness refers to the level of market abuse activities, such as insider dealing or market manipulation, affecting transactions in the market. The FCA currently monitors market abuse using a variety of tools, including the mandatory submission of suspicious transaction and order reports by those involved in executing certain types of financial market transactions.

    The ATV ratio provides an additional indicator for market cleanliness. It looks for abnormal increases in trading volumes of equity instruments and some equity derivatives (including contracts for differences and spread bets, where the underlying is a relevant equity) ahead of potentially price sensitive announcements. The ATV is calculated by observing movements in trading volumes of the relevant securities during an Observation Period (being the period prior to an unexpected potentially price-sensitive announcement where there are no other potentially price-sensitive announcements). To calculate the extent of abnormal trades, the Observation Period is divided into a Benchmark Period and an Announcement Period. The Benchmark Period is the 20-working-day period immediately before the Announcement Period and is used as a "control" period against which potentially abnormal trading volumes can be tested. The Announcement Period is the 10-working-day period immediately before the unexpected, potentially price-sensitive announcement. The test measures whether trading volumes during the Benchmark and Announcement Periods differ significantly from one another, with a 5% variation qualifying as "significant". The FCA will consider Observation Periods for all potentially price-sensitive announcements that it believes the market would not be expecting, provided that no other potentially price-sensitive announcements were made during the relevant Announcement and/or Benchmark Periods.

    The FCA intends to develop additional measures going forward that will help it to further monitor the state of U.K. markets. Further discussion of the ATV ratio, including details of the quarterly ATV ratios for 2018, was included in the FCA's 2018/2019 Annual Report.

    View the FCA's statement on the Abnormal Trading Volume ratio.

    View details of the FCA's 2018/2019 Annual Report.
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