LiquidMetrix WorkStation > Surveillance LiquidMetrix Surveillance Test Engine Guide

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1 LiquidMetrix Surveillance Test Engine Guide Document version 2.0 1

2 Table of Contents Overview... 5 General Settings... 6 Front Running... 8 Wash Trading Best Execution (for Fills) Best Execution for Orders Insider List POTAM Takeover Panel POTAM Takeover Panel (Extended) Insider Dealing Insider Dealing (News Delta) Insider Dealing for Cancelled/Amended Orders Ramping Suspicious Trading Volume (Over Day) Suspicious Trade Size (Single Transaction) Suspicious Trade Size (Large Trade By Segment) Marking the Close Momentum Ignition Self Trading... Error! Bookmark not defined. Market Order Flow Tests Ping Orders Quote Stuffing Unfilled Volume in Auction Layering Spoofing Spoofing (Secondary) Order-to-Trade Ratio Excluding Raised Alerts Appendix Appendix Appendix

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4 Change History Date Changed Description Made by Approved by 14/06/2016 New test definitions for Insider Dealing for Cancelled/Amended orders, Best Execution for Orders, Excessive Unfilled Auction Volume, Spoofing (Secondary) Scoring Rationales added for all tests General Settings update General improvements Prab Sohal Prab Sohal 4

5 Overview This document contains a detailed description of each of the Market Abuse tests covered by the LiquidMetrix Surveillance Workstation. The aim of each test is to highlight suspicious behaviour that may constitute as market abuse. The following is detailed for each test: A basic description of the nature and purpose of the test and the type of abuse it is aiming to detect. A description of the client and market data that will be used perform the test. A description of the parameters and options that can be configured for the test. A description and definition of the scoring method that will be utilised by the test. A view of the 'Test Details Report' that is rendered for the test. The purpose of defining the tests in this manner is to provide clients with enough information to understand the purpose of each test, what the parameters mean and how to interpret the test results. 5

6 General Settings This section is allows users to filter and configure the data that they want to load into the workstation for analysis. Start-up Load Data Loads in the date period selected. Default Timezone Offsets timestamps displayed in accordance to timezone selected. Minimum Test Score Only loads in Test results where score exceeds a certain number. This is useful to filter out unnecessary Tests (such as those with a zero score) and improve the performance of the Workstation. Advanced Data Filter Allows clients to filter the data based on a number of different key fields. The corresponding value fields can take in a comma-delimited list if required. Mark Suspected Auction Trades at Mkt Price Fills executed outside of continuous trading hours are not benchmarked by default. This option allows clients to mark such fills at their executed price (zero improvement). Include Own Benchmarks This option allows clients to load in their own benchmarks that have been supplied 1 to LiquidMetrix. These will be loaded in alongside the standard LiquidMetrix venue benchmarks. 1 For more details on how client benchmarks can be provided to LiquidMetrix, please see the IFS LiquidMetrix WorkStation Import File Definition documentation 6

7 Fills/Orders with Client Identifier Option Each individual test (where applicable) also includes an option to exclude fills/orders that do not contain a client identifier 2. If this options is selected, all fills/orders without a client identifier are completely omitted from test and alert data. (To avoid repetition, this option is not covered in the individual test sections.) Fixed Income configuration The Workstation allows clients to configure their Fixed Income 3 benchmark settings separately from standard Equity/Cash benchmarking. By clicking on the Fixed Income Settings button, the following selection box is available. There are three Fixed Income venues to select from TRC, TRXQ, TRXT. The inclusion and priority of these venues can be adjusted from the configuration screen. In addition, users can select if they wish to enable Cash/Equity benchmarks on such instruments (in addition to the TRAX benchmarks). 2 Field PortfolioManagerID at time of writing 3 Please contact LiquidMetrix Sales if you wish to enable Fixed Income benchmarking 7

8 Front Running Description Front Running involves the broker trading in securities from their own account with advance knowledge of pending client orders. This gives them an unfair advantage by potentially allowing them to enter a position which could then become profitable after the clients' pending order requests are filled. This test analyses each of the client's orders to check whether the Principal BIC has traded on the same side of the book x minutes prior to the client order's Arrival Time. The prices achieved by both Principal and client are also taken into account. Data Used Client Orders (agency) Principal Fills (proprietary) Parameters / Options The Designated Principal BIC is the BIC code used to identify proprietary flow from all data provided. All fills that have this BIC assigned as the relevant Principal Mapping field will be handled as proprietary flow. The Principal Trade Period is the amount of time (mins) prior to the client order that the tests will look for proprietary fills. Proprietary fills that were executed beyond this range will be ignored. 8

9 Scoring & Rationale The scoring formula is intended to demonstrate the % improvement the Principal achieved over the client. If there are no principal fills within the designated period prior to the client order, score is set to 0. If principal fills do exist within this period: If client order was a BUY: Score = (client order price Avg. price from principal fills) x / Avg. principal fill price If client order was a SELL: Score = (Avg. price from principal trades - client order price) x / Avg. principal fill price The score is an expression based around a 1 % difference in price between the client order and the Principle fill as a significant disadvantage to the client. Test Details window The Left-hand side covers standard details on the client order and the principal fill(s), including the total Principal volume traded within the given period before client order, as well as average Principal price and profit (BPS) achieved. The right-hand side contains a graph displaying fills on the market and the client order and Principal fill in relation. 9

10 Wash Trading Abuse Detected By This Test The behaviour describes cases where a client places a number of fills over a period on both sides of the book with no intention of altering their underlying position in the security. Instead, they seek to stimulate liquidity and increase interest from other parties. Basic Method The basic strategy when highlighting possible cases of wash trading is to look for repeated buying and selling of shares such that there is no overall net position or profit and loss realised by the trading (i.e. there is no apparent purpose to the trading as no position has been taken and no profit earned). Data Used Client fills Parameters / Options Maximum Profit Threshold (%) If the profit is above the Maximum Profit threshold %, the score is set to 0. If not, the test continues. Positions Held Threshold This option ensures that the client holds a position in a security for a period shorter than the threshold. If a minimum position holding time in seconds is selected, than the score is reset to 0 if the client holds a long or short position for longer than this threshold time. Minimum % of ADV required If enabled, the traded volume must make up the specified % of the Average Daily Volume for the given stock. Scoring & Rationale The scoring for this test can be broken down into sections. If the total buy volume for day does not equal total sell volume for day (i.e. a new position was taken) the score is reset to 0. The profit % made from the fills is first calculated and derived as follows: 10

11 [Abs (buy value - sell value) / total value traded] x 100 The score is then based on the position reversals that take place with each consecutive fill. The client fills are iterated through and the position reversal ratio is accumulated. For example, a client fill consists of 10 alternating buy and sell orders. Each buy/sell pair has the same volume and execution price so turnover = 500%. Score = Position Reversals 2 x 50 The scoring is intended to suggest 100 as a base score for Tests/Alerts that require further attention. The score is then increased based on the size of the shortfall.) Test Details Report The left-hand side of the Report displays basic fill details as well as some statistics on activity during the course of the day. These include the number of sells/buys, volume traded, value traded, the Position Reversals % (used in score) and the profit generated from the client fills executed. The right-hand side plots these fills against a view of the market during the course of the day. It also displays the stages at which the Reversals took place over the day. 11

12 Best Execution (for Fills) Description The aim of this test checks whether the client has executed with the best price available on EBBO in accordance with their configuration settings. Data Used Client Fills Market prices Parameters / Options Best Execution comparisons with market data can be done using either Value or BPS difference. For Value traded, the Threshold would be shortfall seen as an absolute monetary amount (taking into account CCY). For BPS, The Threshold would be the BPS difference in Price. Comparisons against market data are carried out using Benchmark Type and Benchmark Price Type. Ignore Depth for Quotation Markets For trades executed on quotation markets, LiquidMetrix will look for a single order placed on the book that will fill the full volume required, else mark as illiquid. If enabled, this option will ensure a Touch Price benchmark is always used in such cases. Scoring & Rationale The test calculates whether a price improvement or shortfall occurred when the fill executed. This is derived using the market EBBO around the time of fill based the Benchmark settings configured (type and price type). If no threshold has been provided: Score = 100 if there is a shortfall 12

13 If a threshold has been provided: Score = 100 x (shortfall / threshold). If there is a shortfall but a given threshold limit has not been reached, the test is given a score of 0. If there is no shortfall, again the test is scored as 0. The scoring is intended to suggest 100 as a base score for Tests/Alerts that require further attention. The score is then increased based on the size of the shortfall. Test Details window The left -hand side of the test window displays information about the security and fill in question. It also gives you details of the shortfall (or improvement) in BPS and value. If there is a shortfall and a given threshold limit has not been reached, this will be displayed (as above). The right-hand side of the test window displays the benchmarks available at the time of the fill for each available Venue. 13

14 Best Execution for Orders Description The aim of this test checks whether the client has traded an Order with the best price available on EBBO in accordance with their configuration settings. Data Used Client Orders Market prices Parameters / Options Best Execution comparisons with market data can be based on either Value or BPS difference. For Value traded, the Threshold would be shortfall seen as an absolute monetary amount (taking into account CCY). For BPS, The Threshold would be the BPS difference in Price. Comparisons against market data are carried out using Benchmark Type, of which there are the following options: MarketVWAP = Market VWAP from First to Last Fill MarketDailyVWAP, Market VWAP from trade date Open of First Fill to trade date Close of Last Fill ArrivalTouch = IS vs Arrival Time Touch Price FirstFillTouch = IS vs First Fill Time Touch Price Delay Cost = Difference between ArrivalTimeMid improvement FirstFillMid improvement Scoring & Rationale The test calculates whether a price improvement or shortfall occurred at the point of the given benchmark. If no threshold has been provided: Score = 100 if there is a shortfall If a threshold has been provided: Score = 100 x (shortfall / threshold). 14

15 If there is a shortfall but a given threshold limit has not been reached, the test is given a score of 0. If there is no shortfall, again the test is scored as 0. The scoring is intended to suggest 100 as a base score for Tests/Alerts that require further attention. The score is then increased based on the size of the shortfall. Test Details window The left -hand side of the test window displays information about the security and order in question. It also gives you details of the shortfall (or improvement) in BPS and value. If there is a shortfall and a given threshold limit has not been reached, this will be displayed (as above). 15

16 Insider List Description This test checks all client fills to see whether any clients were listed on an Insider List for the traded security during the transaction date. Users of LiquidMetrix MAD are able to configure their Insider Lists via a separate secure website 4. Data Used Client Fills Insider List configuration (input by User) Scoring & Rationale This test is carried out per trading day per stock. The Individual's designated Unique Client Ref is matched against the client's PMID 5. Alternatively, if the user wishes to check for trading by any Individual, a special Unique Client Ref of "ALLINDIVIDUALS" can be used instead. Criteria checked: Matched client is listed on an Insider List belonging to the User account in question List is related to the traded security and it's period overlaps the time of fill Score = 100 if client fills at least once in a stock that is present on an Insider List for the given trading day If this criteria is not met, score is set to 0. Test normalised to suggest a score of 100 requires attention. Parameters / Options Test Details window 4 See Appendix 3 for more details 5 PMID = PortfolioManagerID, field number 6 on CSV import specification 16

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18 POTAM Takeover Panel Description Stocks listed on the Takeover Panel are subject to numerous rules and regulations, specifically related to how they can be traded. Clients that trade in stocks listed on the Takeover Panel at the time of trade will receive a high test score. The test is carried out per given trade date and stock. Data Used Client Fills Takeover Panel data Scoring & Rationale Score = 100 if there is at least one fill within trading day where the trade time falls between the POTAM "Offer Commenced Date" and the time the stock was removed from the POTAM list If no such fills can be found over the course of a trading day, the score is set to 0. (Test normalised to suggest a score of 100 requires attention.)parameters / Options Test Details window 18

19 POTAM Takeover Panel (Extended) Description This test is an alternative POTAM test as it extends the trade monitoring period to also include those that were executed up to x working days* prior to the stock being listed on the Takeover Panel. The actual day of the POTAM listing is not included as part of this period. Data Used Client Fills Takeover Panel data Scoring & Rationale Score = 100 if at least one trade was executed up to x working days* prior to POTAM "Offer Commenced Date" * Mon-Fri, no weekends. If this criteria is not met, score is set to 0. (Test normalised to suggest a score of 100 requires attention). Parameters / Options Test Details window 19

20 Insider Dealing Abuse Detected By This Test Insider Dealing can occur when a client enters into a position in a security whilst in possession of non-public information about the company in question. Basic Method This test iterates through each client trade to check whether a news announcement for the traded security was published up to x days after the trade took place. There are 3 additional scoring options that the user may apply: The first option looks at the profitability of the trade from the point of view of the client. This is done by analysing: The market price within 2 hours of the trade or The closing price for the news announcement published date or The opening price for the day after the news announcement published date or The closing price for the day after the news announcement published date. A second option is to apply a minimum profit threshold so only the trades where there is at least a profit p will receive a score. This profit margin is based on the profitability horizon selected, so therefore this test is only applicable where the first option has been selected. Lastly, the user can select an increased trading threshold where the test is only given a score if the daily volume on the news announcement published date is greater than n% of the average daily volume over the preceding days. Data Used Details of the client's trade (Fill or Order). News announcements Opening price and closing prices related to the news announcement. 20

21 Parameters / Options News Providers and Categories can also be filtered by clicking the News Providers/Cats button (which opens window below). Scoring & Rationale The score is set to 0 if either no related news announcements are found, or the profit is less than or equal to 0%. In all other cases, the score is: Score = 10 x profitability* in % * The maximum profitability seen from any relevant announcements within given period 21

22 The use of 10 is based around a probable abuse on a 10% profit or avoidance of loss giving a score of 100. Increased Trading % Threshold If increased trading % threshold n is enabled, the score is set to 0 unless the trading volume on the news day has increased by more than n% over the average trading volume over the preceding days. Apply Minimum Profit If the apply minimum profit p is enabled, then the score is set to 0 unless the profit was more than p percent or value based on the profitability horizon chosen. Dedicated stories only If enabled, only news stories linked to a single stock will be included Exclude closed day positions If enabled, the test score is set to zero if client has bought and sold in equal quantity on the trade date in question. Test Details Report The left-hand section of the Report provides basic information on the trade, such as the trade's time, size and side. The price benchmark for T+2hrs and the corresponding profit in relation to this benchmark. The market volume on the news announcement published date is compared to the average volume across the days prior to news announcement. 22

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24 Insider Dealing (News Delta) Abuse Detected By This Test This test monitors for Insider Dealing by specifically looking for news announcements released after the trade that have moved the market in a favourable direction for the client. Basic Method This test iterates through each client trade to check whether a news announcement for the traded security was published up to x days after the trade took place and moved the market in a favourable direction for the client. This is evaluated in the following way using a +-1 hour (primary market) price delta at news published time: If client has BOUGHT, look for announcements with a positive delta (price has increased) If client has SOLD, look for announcements with a negative delta (price has dropped) If multiple announcements are found, we select the news announcements with the largest (absolute) delta for deriving the eventual score. Other options that can be enabled include: Minimum Delta Threshold - only takes into consideration announcements that move the market by a minimum of y BPS Minimum Trade Value - only takes into consideration trades of a value large than z Data Used Details of the client's trade (Fill/Order) News announcements Market prices related to the news announcement. Parameters / Options 24

25 News Providers and Categories can also be filtered by clicking the News Providers/Cats button. (See Insider Dealing section for screenshot of options made available). Scoring & Rationale The score is set to 0 if either no relevant news announcements are found. In all other cases, the score is: Score = 75 + (price delta BPS x 1 / (weekdays between trade and announcement+ 1)) The 75 multiply factor is intended to score the Test as 100 with a news event generating a 1% price movement 3 days after the client trade. The score increases depending on the price movement and the proximity of the related news announcements to the trading activity. Minimum delta threshold If enabled, the score is set to 0 unless an announcement is found that moves market by y BPS. Minimum trade value If enabled, the score is set to 0 unless trade is at least of value z. Dedicated stories only If enabled, only news stories linked to a single stock will be included. Exclude closed day positions If enabled, the test score is set to zero if client has bought and sold in equal quantity on the trade date in question. 25

26 Test Details Report The left-hand section of the Report provides basic information on the trade, such as the trade's time, size and side. The price delta +-1 hour is also displayed as well as the time taken (if more than one announcement has been found). The market volume on the news announcement published date is compared to the average volume across the days prior to news announcement. 26

27 Insider Dealing for Cancelled/Amended Orders Abuse Detected By This Test Insider Dealing can occur when a client enters into a position in a security whilst in possession of non-public information about the company in question. Basic Method NOTE: Due to their nature, cancelled orders are treated differently to amended orders. For the former, the profitability is looked at from the position of the opposite side of the trade in order to better evaluate abuse. This test iterates through each cancelled or amended order to check whether a news announcement for the traded security was published up to x days after the order was cancelled. There are additional scoring options that the user may apply: By default, the test will score a low score if any news announcement is found within the requisite number of days after cancellation/amendment. The first option looks at the profitability of the order from the point of view of the client. Profitability in this case compares the FirstFill mid-price against the mid-price taken from one of the selected horizon points: The market price within 2 hours of the trade or The closing price for the news announcement published date or The opening price for the day after the news announcement published date or The closing price for the day after the news announcement published date. A second option is to apply a minimum profit threshold so only the trades where there is at least a profit p will receive a score. This profit margin is based on the profitability horizon selected against the order, so therefore this test is only applicable where the first option has been selected. For the third option, the user can select an increased trading threshold where the test is only given a score if the daily volume on the news announcement published date is greater than n% of the average daily volume over the preceding days. The fourth option allows users to include only news stories that are linked to a single stock rather than multiple. The fifth option allows users to filter out instances where the close of day position is zero, i.e. Buy volume is the same as the sell volume. In such instances, the score is reset to zero. 27

28 Data Used Details of the cancelled/amended order. News announcements Opening price and closing prices related to the news announcement. Buy and Sell traded Volume for day Parameters / Options News Providers and Categories can also be filtered by clicking the News Providers/Cats button (which opens window below). 28

29 Scoring & Rationale The score is set to 0 if either no related news announcements are found, or the profit is less than or equal to 0%. In all other cases, the score is: Score = 10 x profitability* in % * The maximum profitability seen from any relevant announcements within given period. The use of 10 is based around a probable abuse on a 10% profit or avoidance of loss giving a score of 100. Increased Trading % Threshold If increased trading % threshold n is enabled, the score is set to 0 unless the trading volume on the news day has increased by more than n% over the average trading volume over the preceding days. Dedicated stories only If enabled, only news stories linked to a single stock will be included Exclude closed day positions If enabled, the test score is set to zero if client has bought and sold in equal quantity on the trade date in question. 29

30 Test Details Report The left-hand section of the Report provides basic information on the trade, such as the trade's time, size and side. The price benchmark for Close on News day and the corresponding profit in relation to this benchmark. The market volume on the news announcement published date is compared to the average volume across the days prior to news announcement. 30

31 Ramping Abuse Detected By This Test Ramping involves clients placing a series of consecutive fills in a given security with the aim of affecting the price of that security in their favour. The fills are usually of a relatively small size and for the same side of the book. Basic Method This test initially evaluates the client's traded volume on a per security per day basis. If the traded volume exceeds x % of the total on-book traded volume (primary market), the client's fills are analysed in the following way: The client's fills (grouped by security and trading day) are ordered chronologically. If an unbroken sequence of at least size N is found containing same-sided fills, this suggests possible ramping activity. The executed price of the first and last fill in the given sequence are then compared and recorded to evaluate price impact, before moving on to check for the next sequence Data Used Client Fills Market volume traded Parameters / Options Minimum Trade Sequence count The minimum number of consecutive same-sided fills required for a trading pattern to be treated as a potential Ramping sequence. Minimum Daily Traded Volume The minimum % of volume traded (on Primary venue) required by the client before the test can be given a score. Ignore Passive Trades If enabled, this will ensure passive trades are omitted from the test. This categorisation is based on the spread captured by the fill. Any fill with a spread capture of >=75% is deemed passive. 31

32 Scoring & Rationale If the client has traded above the defined minimum percentage of the total volume traded %, the ramping check is subsequently carried out. If not, the score is set to 0. If there are not sufficient number of consecutive fills of the same side, the SCORE = 0. Otherwise: Score = 20 x % price movement caused by the suspected ramping fill sequence The scoring is based on a 5% price movement from Ramping sequence of fills equates to a score of 100, which would require attention on a normalised scale of If more than one ramping sequence is detected over the course of the day, the largest ramping sequence is selected for use by the test.) Details Screen This left-hand side of the Report displays some basic details of the activity during the course of the day, including details of the instrument and trade date. 32

33 It also describes the ramping period in details, including the number of consecutive fills, the side and volume traded and the period over which the Ramping took place. The client's participation rate is also displayed. The right-hand side plots these client fills on a view of the market activity for the day. Suspicious Trading Volume (Over Day) Abuse Detected By This Test This test is designed to identify whether the client may have attempted to manipulate the price of a security by trading an unusually high volume in a security over a single trading day. Basic Method The test examines the total volume traded by the client in a security on a given day and compares it with: the relevant security's Average Daily Volume (the average amount that this security trades across all markets on which it is listed) or The security's Total Volume Traded on the day. The test score can be adjusted by a percentage scaling factor s that uses the percentage difference between the client volume and the security volume. Data Used Client Fills Average Daily Volume (ADV) figures for the security. This is a 30 day rolling average. Total Volume Traded for the security. Parameters / Options 33

34 Scoring & Rationale The Volume Benchmark can be configured as either the Average Daily Volume or the Total Volume Traded on the specific trading day. Score = [client daily traded volume / Volume Benchmark] x 100 For example, if ADV is selected, this score would represent the % of ADV represented by the client's trading on this day. The score can optionally be adjusted by supplying the percentage p scaling factor as follows: Score = ( (client daily traded volume / Volume Benchmark) x 100 ) x 100 / p The score represents a relative percentage of the client trade flow against either ADV or volume on the day so a score of 100 would represent 100% of volume. Test Details Report The left section of the Report displays basic details on the security traded, the number of fills and volume traded by the client on the test date and the Average Daily Volume (ADV) of this security. The right section of the Report shows the daily total volumes traded over the previous 7 trading days in the market (orange) and the volume traded by the client on the day of the test (blue). An optional tab below lists all client fills executed that day. 34

35 Suspicious Trade Size (Single Transaction) Abuse Detected By This Test This test is designed to identify individual client fills that are substantially larger than the 'normal' size traded in the market. A high test score might indicate either insider knowledge or an attempt to manipulate the price of a security. Basic Method The test examines the size of each individual fill by a client and compares the volume traded with either the median or average fill size for that security. If the size is significantly larger than the market median/average then a high test score will be generated. Data Used The size of each client fill The median fill size for this stock. This is based on 30 day rolling history of all trades in a security. The average fill size for this stock. This is based on 30 day rolling history of all trades in a security. Parameters / Options 35

36 Scoring & Rationale Score = [client trade volume / Market Median Size or Average Trade Size] The score demonstrates the client s traded volume as a proportion of the median or average trade size based around a score of 100 for a fill 100 times the median or average If supplied, the score can be adjusted by the percentage p scaling factor (Threshold) as follows: Score = [client trade volume / Market Median Size or Average Trade Size] x 100 / p Test Details Report The left hand section of the Report gives basic details of the fill being tested, such as the volume traded by the client, and the Market Median/Average Trade Size based on a 30 day rolling window. The right hand section shows a (blue) spike graph of the volumes of all market trades over the past 7 days (relative to the test date). For the test date the size of the client s trade is shown as an orange bar. Note that if the client's fill was printed on-book, a single blue spike the same size as the orange bar would be expected, thus symbolising that the client's fill being reported onto the public market data feed. 36

37 Suspicious Trade Size (Large Trade by Segment) Abuse Detected By This Test This test is designed to identify individual client trades/orders that exceed the threshold limit imposed. Such large trades/orders might indicate either insider knowledge or an attempt to manipulate the price of a security. Basic Method The test examines each individual client trade/order and compares either its volume or traded value with pre-defined threshold limits. These thresholds are configured on a per-market segment basis (LSE). Alternatively, a special segment code ALL can be used to apply thresholds across all segments. If both ALL and specific segments are specified, the specified segment threshold takes precedence. If the trade/order volume or value is found to be significantly larger than the threshold limit, a high test score will be generated. Data Used The value (price x volume) or volume of each client trade/order. The corresponding LSE market segment belonging to the security (if applicable) (See Appendix 1A for full list of LSE segments) Scoring & Rationale Score = [client trade/order volume or value / segment threshold] x 100 The score normalises to 100 the client s traded volume as a proportion of the segment threshold 37

38 Test Details Report The left-hand side of the Report displays some basic trade/order information such as the trade time, side, price and associated LSE market segment if one exists. The volume and value traded are also displayed as well as the relevant threshold value selected (either trade value or volume). The right hand section shows a (blue) spike graph of the volumes (or trade values) of all market trades over the past 7 days (relative to the test date). Depending on whether volume or trade size is the threshold type, for the test date the size of the client s trade is shown as an orange bar. The threshold limit is also displayed as a (red) dotted line. 38

39 Marking the Close Abuse Detected By This Test This test is designed to look at attempts made by traders to influence the closing price of a security by heavily trading securities just before continuous trading ends. Basic Method The test starts by looking at the volume traded by the client within the last 10 minutes of trading and compares this to the volume traded by the rest of the market during the same time. If the client's volume is a significant proportion of the market, two further factors are then incorporated into the overall score. Whether the client was principally buying or selling. For abuse to be taking place, it is logical that the vast majority of the client's trading volume should be either buys or sells in order to influence the price. Did the market price actually move in the last 10 minutes? If so was it in the direction of the client's buying or selling activity. This test can be set to filter out any circumstances where the client was buying as well as selling or where the client's total value traded was below a minimum threshold. Data Used The size of each client fill Market prices for the security Parameters / Options Including Price Movement Analysis If this option is selected, the score is multiplied by the percentage price movement in the direction of the client. If this percentage value is negative (i.e. the price is moving away from the client), the score is reset to 0. 39

40 Require all Trades have same side This option enforces a check to see if all client fills during last 10mins belong to the same side. If this is not the case, score is reset to 0. Require minimum Trade Value This option considers only fills where the total value traded over the last 10 minutes is greater than a given threshold value. If not, the score reset to 0. Ignore Passive Trades If enabled, this will ensure passive trades are omitted from the test. This categorisation is based on the spread captured by the fill. Any fill with a spread capture of >=75% is deemed passive. Scoring & Rationale Scoring for this test can be broken down into sections depending on how the test has been configured. The standard score will be as follows: Score = (Client %Participation in Last 10 Mins) x Max(BuyFactor, SellFactor) The score illustrates the client s traded volume as a proportion of the traded volume within the last 10 mins on market. This is amplified by the Buy/Sell factor. Heavy trading on a single side is more likely to impact market price, hence this ratio will increase the score accordingly. If 50% of volume is traded on one side and the price moved by 2%, this would equal a score of 100. If "Including Price Movement Analysis" is included: Score = Score x %PriceMoveInDirectionOfClient For example, if the client traded 60% of the volume in the last 10 minutes and 95% of the client fills were Buys and the price moved up by 1.5%, the score would be: 60 x 0.95 x 1.5 = 85 40

41 Test Details Report The left-hand side of Report displays basic details of the trading day and the security in question. It summarises the client's trading activity that took place, including number of buys/sells, value traded and their level of participation in the market. The right-hand side displays market activity over the last 10 minutes before close, including: market fills the market price change over the period (BPS) and the direction it moved in the closing price difference between closing price and Last 10Min price delta The full trades list is also optionally available. 41

42 Momentum Ignition Abuse Detected By This Test This test is designed to look at clients that execute trades with the intention of starting or exacerbating a trend in order to create an opportunity to later unwind a position at a favourable price. Basic Method The test analyses patterns of consecutive same-side fills which are then followed by a trade or series of trades on the opposite side of the book that unwinds this position. The test first compares the client's traded volume (for day) is at least x percent of the daily traded volume before proceeding to look for the largest momentum sequence over the given day. It does this by: Scan through ordered trades to look for "momentum" fills (consecutive fills of same side) After the momentum sequence has ended, look for a sequence of "reversal" fills at or near total momentum volume Compare traded values for each to calculate potential profit. Record highest scoring sequence from list of momentum sequences From the list of momentum sequences collated, the highest scoring sequence is then presented. Data Used Client Fills Total Volume Traded on instrument's primary venue for given day Parameters / Options Minimum momentum sequence count The minimum number of momentum trades required for sequence to be considered. Minimum % of daily traded volume The minimum % of volume traded (on Primary venue) required by the client before the test can be given a score. Scoring & Rationale If client trades less than x % of Volume Traded on Primary, score = 0. 42

43 Score = Momentum fills count x Profit % The score from the profit is amplified the momentum sequence of consecutive fills. It was based around a 10 profit from a momentum sequence of 10 fills. The test will display the biggest scoring sequence for the given day. Test Details Report The left-hand side of the Report displays details of the highest scoring sequence from the client's trade data for the trading day and security in question. The start and end of period is displayed, as well as the sizes and volume of the momentum and reversal. The client's participation in relation to the primary market and any subsequent profit is also displayed. The right-hand side of the Report displays the sequence alongside market trading activity in the instrument. 43

44 Self-Trading Abuse Detected By This Test This test is designed to look at clients execute trades in a given instrument listing on both sides of the book at approximately the same time. This behaviour could suggest increased activity in an instrument without altering the client's underlying net position. Basic Method The test checks each Buy fill in turn for opposite-side trading activity within +- tolerance (ms) of the trade time. Each matched fill should also have the same matching price/currency and volume. The test is calculated by looking for Sell fills in and around the time of each Buy fill. Data Used Client Fills Parameters / Options TradeTime Tolerance The time window (in ms) before and after each Buy fill to look for trading on opposite side of book. Scoring & Rationale This is normalised to a simple yes/no. If a client has traded both sides of the order book within the designated time window, Score = 100. Else Score = 0. 44

45 Test Details Report The left-hand side of the Report displays details of both the primary (Buy) fill and the Sell fill(s) captured within the configured time window. 45

46 Market Order Flow Tests The following tests are related to clients' market order flow (MOF) data (unless stated otherwise). The MOF data will be the market orders sent to market, including new and modified orders and those deleted. At least the following information is required for each market order: Order ID The public order ID (if available) ISIN / CCY Venue Client ID / TraderID Time of action Volume Limit Price Order Type Trades* The venue the order was sent to Where available, the identifiers for client and trader Order entered/modified/deleted Order volume entered Price order was entered at FOK, IOC, GTD etc. quantity, volume filled, trade time * Multiple records This dataset is later processed and is grouped by client, instrument, venue and trade date before test analysis is conducted. 46

47 Ping Orders Abuse Detected By This Test This test is designed to look at attempts made by traders to ascertain the level of liquidity available by entering very small orders that often go untraded. This technique is commonly used on dark venues. Basic Method The test is based on both the client's order-to-trade ratio and the comparative average sizes of the orders and trades. The order-to-trade ratio is based on untraded orders of type Fill-or-Kill (FOK) and Immediate-Or-Cancel (IOC) against all trades. The combination of the averages and the order-to-trade ratio help indicate: whether the size of orders entered are indicative of the trades executed whether the quantity of order* messages are reasonable for the quantity of trades executed. Users are able to specify a minimum order count and minimum order-to-trade ratio in order to filter the number of results generated. Data Used Client's untraded FOK/IOC market orders Client fills Parameters / Options Minimum Order Count The minimum number of untraded FOK/IOC market orders required for the test to be given a score. Minimum Order-to-Trade Ratio The minimum order-to-ratio required for the test to be given a score. Scoring & Rationale Order-to-Trade Ratio = Total Untraded FOK/IOC Orders Count / Total Trades Count 47

48 Score = (Average Trade Size / Average Order Size) x (Order-to-Trade Ratio / 5) A high score indicates that the average order size is too small given the average size of trades executed with the possibility of a high order-to-trade ratio. If the Average Trade size is much larger than the average Order Size (10 Times), it s an indication of a misleading device, and if there are 10 times the number of unexecuted order messages this supports the Score of 100 for 10 times volume executed and 10 times order to trade messages. The order-to-trade ratio is divided by the value of 5 as we would expect a hit rate for orders as at least one in 5 Test Details Report The left-hand side of the Report displays summary details of the client's market flow data for the trading day and security in question. It summarises the client activity that took place, including number of market orders, trades and the order-to-trade ratio. It also displays the average order and trade sizes. The left-hand side of the Report plots the market orders against the client's trading activity. Other order types are also represented. 48

49 Quote Stuffing Abuse Detected By This Test This test is designed to look at traders that enter a high volume of orders with the aim of creating uncertainty for other participants, slowing down their process and to camouflage their own strategy. Basic Method The test analyses time periods during the day where the client's message throughput is at its highest in relation to market activity. To do this, the test analyses the client's sent order messages. For each order "event", the subsequent time window (1-second and 5-second) is monitored for order and trade activity. The test initially compares the client's order activity with market order activity during the given period. If enabled by the user, a further test is conducted to compare the client's trade activity with market trade activity for the given period. (Market activity in this case is across all participants for the relevant venue.) The test scores each time window in turn and picks the one with the highest score. Data Used Client order messages (New, Mod, Del) Client trades executed Market orders (All) Market trades (All) Parameters / Options Interval Analysis Period The time period monitored for activity after each event. Minimum Order Count The minimum number of orders the client needs to send during period in order for test to generate a score. 49

50 Include Market Trade Analysis The option to include trade activity comparison analysis between client and market within the test scoring. Scoring & Rationale The test score calculated for each time period is as follows: Score = ((Client order messages count / minimum order count) x 100) / market order count A high score indicates that the client was active in comparison to the market. If user decides to Include Market Trade Analysis, the above score is amended as follows: Score = Existing Score - ((Client trades count / market trade count) x 100) / 3 This amendment reduces the existing score to take into account how heavily the client was trading during the period. Heavy trading in relation to the market can go some way in justifying high order activity. The score is based upon the ratio of order messages on the instrument verses the whole market, ad normalised to a value of 10 if the client is generating the majority of messages. The divisor of 3 takes account of a reasonable number of market messages per order message and is used to reduce the weighting of the Trade Analysis to the overall score, of which order analysis should maintain the largest weight. Test Details Report 50

51 The Report displays details of the highest scoring period from the client's market flow data for the trading day and security in question. The start and end of period is displayed, as well as the client activity in comparison to what was seen on the relevant market during the same period. 51

52 Unfilled Volume in Auction Abuse Detected By This Test This test is designed to look at traders where an unduly high volume of orders are entered into the market during the Open and Close Auctions with the desire to move the price. Basic Method NOTE: Tests for Open and Close Auctions are generated separately. The test looks at the volume of market orders entered into the market during the given auction, market and client. This volume is then compared to the executed volume during the same auction. Data Used Market orders Executions Parameters / Options Ignore Auctions with no trades If enabled, the test will score as zero all cases where there was no volume filled. Scoring & Rationale The test score calculated is as follows: Score = (Volume Ordered / (Volume Filled x 2)) x 100 A high score indicates that the client was entering unusually large volumes into the Auction phase which may require further investigation. An arbitrary multiplier of 2 is used to increase weighting of the filled volume. 52

53 Test Details Report The Report displays details of the volume ordered and filled during the given Auction phase, as well as an audit of the activity. 53

54 Layering Abuse Detected By This Test This test is designed to look at traders' behaviour when entering orders onto the market, specifically the price level at which they are entered. Consistently entering orders away from mid-price may suggest attempts to manipulate the market price. Basic Method The test checks all New orders entered by client on the venue in question and records how many price levels away from mid-price the order was entered. The test then calculates the percentage of times the client entered an order at price level x away from market mid-price. Data Used Client order messages (New, Mod, Del) Market orders of venue in question Parameters / Options Price Level Threshold The price level away from mid-price at which we are looking for orders entered. Minimum Orders Count The minimum number of orders required to be sent at this price level for test to be scored. Untraded Orders only If enabled, the test will only include untraded market orders in the analysis. Orders that have at least partly executed will be excluded. 54

55 Scoring & Rationale If orders entered at or below price level x is below Minimum Orders Count, Score = 0. Score = (Client orders entered at or below price level / Total client orders count x 100 ] The score is the ratio of order the clients entered at the price level(s) compared to their overall order flow. A significantly large percentage away from top of book could be deemed suspicious. If all orders are entered below the price level, the score will be 100. Test Details Report The left-hand side of the Report displays details of the client's market flow data, the total number of NEW orders entered as well as the client's order activity at the specific price level. The right-hand side of the Report provides a price level breakdown of the client's order activity. 55

56 Spoofing Abuse Detected By This Test This test is designed to highlight cases where orders are entered on one side of the book with a view to instead trade on the opposite side of the book at a favourable price. Basic Method The test checks each client order in turn to monitor a given time period x after order entry time for trades executed on opposite side of book. For each order: Check period for trades on opposite side of book If trades are found, derive "profit" by using traded volume and the market mid-price (of relevant market) at both order entry time and time of 1st trade If a Minimum Profit Threshold y is being applied, check whether client generated a "profit" that exceeds y before scoring behaviour pattern The highest scoring pattern over the course of the trading day is selected by the Test. Data Used Client market orders Client trades Mid-price market data Parameters / Options Trade Activity Interval The period of time to monitor for opposite-side trades after initial order entry Untraded Orders only Must be checked if only untraded orders are to be included for analysis. Minimum profit threshold The minimum amount of profit (value) required for the behaviour pattern to be given a test score. 56

57 Scoring & Rationale Derived profit using difference between (mid-price at order entry time x total traded volume*) and (mid-price at time of first trade x total traded volume*). * Total traded volume taken from opposite-side trades within monitored period. Score = Profit Percentage Use of 100 is to normalise score to a range where anything above 100 warrants investigation, so scores above 100 indicate a profit is being made above the minimum profit criteria. Test Details Report The left-hand side of the Report displays details of the highest scoring sequence found during the trading day. Details of the primary order are displayed alongside other secondary (same-sided) orders over the period. It also displays the opposite-side trades seen and the profit realised (based on midprice movement). The right-hand side plots the orders and trades alongside market trades at the time. 57

58 Spoofing (Secondary) Abuse Detected By This Test This test is designed to highlight cases where orders are entered on one side of the book with a view to instead trade on the opposite side of the book at a favourable price. The methodologies behind this test and the original Spoofing test are slightly different. The original spoofing test check each order in turn and look for trades on opposite side of book within a given interval. This test checks each Fill in turn and sees whether there were orders on the opposite side of the book at execution time (regardless of interval). Basic Method The test checks each client Fill in turn to if there were orders resting on the opposite side of the book at the time of execution. For each Fill: Check for orders added to opposite side prior to time of execution that are still on book at time of execution If orders are found, derive "profit" by using traded volume and the market mid-price (of relevant market) at both Fill execution time and time of earliest order placed If a Minimum Profit Threshold y is being applied, check whether client generated a "profit" that exceeds y before scoring behaviour pattern The highest scoring pattern over the course of the trading day is selected by the Test. Data Used Client market orders Client Fills Mid-price market data Parameters / Options Untraded Orders only Must be checked if only untraded orders are to be included for analysis. 58

59 Scoring & Rationale Score = 50 if active orders found on opposite side of book Score = 75 if fill was executed during continuous trading Score = (25 x Profit Percentage) if profit is realised Derived profit using difference between (mid-price at trade execution time x total traded volume*) and (mid-price at time of earliest order x total traded volume*). * Total traded volume taken from opposite-side orders resting on book at time of fill execution. Use of 100 is to normalise score to a range where anything above 100 warrants investigation, so scores above 100 indicate a profit is being made above the minimum profit criteria. Test Details Report The left-hand side of the Report displays details of the highest scoring sequence found during the trading day. Details of the primary fill are displayed alongside other secondary (same-sided) fills over 59

60 the period. It also displays the opposite-side trades seen and the profit realised (based on mid-price movement). The right-hand side plots the orders and trades alongside market trades at the time. 60

61 Order-to-Trade Ratio Abuse Detected By This Test This test is designed to highlight cases where clients are sending a relatively high percentage of orders to the market in relation to the trades executed. This is a special type of test that aggregates across all given instruments. Basic Method The test compares the client's order count with their trade count as a ratio. (Modified orders are counted as a single order.) The tests are aggregated for all instruments in the following manner: Per Client + Venue + Trade Date combination : These are marked with instrument name "AGGREGATEDBYCLIENTVENUE" Per Venue + Trade Date combination : These are marked with instrument name "AGGREGATEDBYVENUE" Data Used Client market orders Client trades Parameters / Options Enable Client/Venue statistics Must be checked in order to generate aggregated statistics based on Client + Venue + Trade Date. Enable Venue-only statistics Must be checked in order to generate aggregated statistics based on Venue + Trade Date. Scoring & Rationale The scoring is a simple order to trade ratio. Score = Total Orders / Total Trades 61

62 Test Details Report The Report displays details of the order and trade totals split by side, average order and trade sizes as well as the Ratio itself. (The client is always displayed regardless of the aggregation type.) 62

63 Excluding Raised Alerts The Workstation does allow users to exclude alerts raised if so desired. In order to exclude an alert: Right-click on chosen Alert and select "Exclude...". Enter Reason for excluding Alert and click "Exclude" button. Alert should now disappear from Alerts tab view. 63

64 Excluded Alerts can still be viewed and re-included by checking the "Show excluded alerts" checkbox from bottom of Alerts tab. This will display all excluded alerts. By hovering over each one, you will see the exclusion reason displayed. 64

65 To re-include, simply right-click on Alert and select "Re-include" 65

66 Appendix 1 A. LSE Segment List Segment Code SET0 Description FTSE 100 ACC TICK SET1 FTSE 100 STMM FTSE 250 SET3 SET2 SSMU AMSM ETF2 OTHER IRISH SETS STANDARD LISTED OR AIM EURM AIM ON SETS EXCHANGE TRADED FUNDS (MULTI-CURRENCY) ETC2 EXCHANGE TRADED PRODUCTS MULTI-CURR. 2 ETCS EXCHANGE TRADED PRODUCTS ETCU EXCHANGE TRADED PRODUCTS MULTI-CURR. 3 SFM1 SFM2 SFM3 SFM4 SSQ3 SSX3 SSX4 SSX4 SETS - Specialist Fund Market SETSqx - Specialist Fund Market CCP SETSqx - Specialist Fund Market Quoted NON- CCP SETSqx - Specialist Fund Market Non Quoted Non CCP SETSQX 3 QTD. CCP SETSQX 3 QTD. NON CCP SETSQX 4 NON QTD. NON CCP SETSQX 4 NON QTD. NON CCP 66

67 ASQ1 ASQ2 ASX1 ASX2 ASXN INSD AIM ON SETSQX 1 CCP AIM ON SETSQX 2 CCP AIM ON SETSQX 1 NON CCP AIM ON SETSQX 2 NON CCP AIM ON SETSQX NON QTD. NCCP INVESTMENT PRODUCTS LVSD LEVERAGED PRODUCTS WQUO QUOTED WHOLESALE REG MKT UKGT INCP CNVE STBS GILT CRNR CRTR CWNR CWNU CWTR CWTU PSNR IOBE IOBU IBSG EQS ITR ORB GILTS INTERNATIONAL CORPORATES & OTHER BONDS CONVERTIBLES (FIRM QUOTED) STERLING BONDS QUOTED GILTS CORP.RETAIL DEBT REG.MKT CORP.RETAIL DEBT REG.MKT.TD/RP CORPORATE WSALE.DBT.REG.MKT. CORP. WSALE.DEBT EXCH. REG. CORPORATE WSALE.DBT.REG.MKT.TR CORP. WSALE.DEBT EXCH. REG.T/R PUBLIC SECTOR DEBT REG.MKT INT. ORDER BOOK CCP (EUROCLEAR BANK) INT. ORDER BOOK NON CCP (UNCLEARED) International Board - SGX EUROPEAN QUOTING SERVICE INTERNATIONAL TRADE REPTG. SRV 67

68 MISC MISL MISCELLANEOUS (NON QUOTED) MISCELLANEOUS LSTD. NQ Appendix 2 A. News Sources LSE Regulatory Yahoo Deutsche Boerse Direkt Euronext Oslo Bors Appendix 3 A. Configuring Insider Lists Insider Lists on the LiquidMetrix Workstation can be created securely at Once the user has logged in using their given credentials, they can set up Insider Lists in two different ways: Manual set-up 1. Create one or more Individual from the right-hand area of screen. These are the Insider entities that will need to be added to the given List. Each entity must have a unique client ref that corresponds to their TraderID 68

69 2. Once the Individual(s) have been created, we can then create the Insider List. These are created from the left-hand area of the screen as shown below. 3. When the list has been created, simply click the green icon next to the list to pop up a list of Individuals. Simply add the Individual by selecting them and using the green arrow highlighted. They can also be removed from lists using the opposite arrow. 4. To delete a list, use the red icon next to the List as displayed. 69