A trainee, an off-the-record bid and a market-making desk
Tom is a trainee in the corporate broking team at Halloway Partners, an FCA-authorised firm with a market-making arm. On Monday he attends a routine client meeting with the CFO of Draymore plc, a listed industrial company. At the end of the meeting the CFO says, 'off the record, we're going to announce an offer for Carrick Group in about three weeks, at around a 45% premium; the board signed off on Friday'. Tom is not added to any insider list, and no wall-crossing procedure is followed. Back on the desk, the head of market making asks how the meeting went. Tom says 'nothing much', but that afternoon he tells a fellow trainee that Carrick shares 'might be about to move'. The fellow trainee emails a friend at another bank. On Tuesday the market-making desk increases its holding of Carrick shares by 400,000, describing it as normal inventory for client flow.
1. Is the CFO's statement inside information, and does it matter that it was 'off the record' or not yet final?
Read the worked answer
Applying MAR Article 7. Information is inside information if it is of a precise nature, has not been made public, relates directly or indirectly to one or more issuers or instruments, and if made public would likely have a significant effect on the price of those instruments.
- Precise. A stated intention to make an offer, at around a 45% premium, with board approval already given, within a three-week window, is specific enough to enable a conclusion about the likely direction of Carrick's share price. A bid premium of that size is not a vague aspiration.
- Non-public. Nothing has been announced.
- Price-significant. A 45% premium would plainly move the target's shares.
- Relates to an issuer. It relates to Carrick as target and Draymore as bidder; both are within scope.
'Off the record' is irrelevant. The label is a social convention, not a legal one. MAR does not recognise it, and the CFO's own disclosure may itself be unlawful disclosure under Article 10.
'Not final' is not fatal. The information need not be certain. Recital 16 of MAR confirms that information can be precise even where a process is ongoing, provided it is specific enough to allow a conclusion about the possible effect on price. A signed-off board decision three weeks from announcement is well past that threshold.
The information therefore became inside information in Tom's hands on Monday, and it did not stop being inside information because it was passed on informally.
2. What are the obligations of Tom, the market-making desk and the firm, and could the market-making defence apply?
Read the worked answer
Tom. Once in possession, he must not deal, must not recommend or induce anyone to deal, and must not disclose it other than in the proper course of employment (MAR Articles 8 and 10; section 52 of the Criminal Justice Act 1993). Telling the fellow trainee 'might be about to move' is a tip, not a harmless hint; the fellow trainee's email to another bank is a further unlawful disclosure, and the friend is now also in possession.
The desk. Buying 400,000 Carrick shares while the firm holds inside information engages Article 8(c) - using inside information to acquire financial instruments to which that information relates. The size of the position is evidence, and 'normal inventory' will be tested against the desk's actual trading patterns.
The market-making defence (MAR Article 9). It can protect a firm dealing in the ordinary course of market making, but only where the firm has established, implemented and maintained adequate and effective internal arrangements, including effective information barriers, that prevent the persons making the trading decision from having access to the inside information. Here the trainee sat on the market-making desk while recounting the meeting. The wall does not exist on these facts, so the defence is very unlikely to be available. Article 9 also does not protect conduct that is not genuine market making.
The firm. Under Article 18 it must draw up and maintain an insider list; none was created. It must have arrangements to detect and report suspicious orders and transactions (Article 16; SUP 15.10). It should have suspended dealings in Carrick on Monday evening. Senior managers with responsibility for compliance and for the broking business face questions about the barrier regime.
3. What should the firm do now, and what must not happen?
Read the worked answer
Do now.
- Escalate to compliance and the MLRO immediately, out of hours if necessary, and freeze new dealing in Carrick and Draymore.
- Preserve everything: meeting notes, desk chat, emails, the trainee's phone if the firm has the right to review it, and trading records.
- Open an insider list for the matter with the CFO's statement as the trigger event, and cross-reference who knows what.
- Investigate the 400,000-share purchase: who decided, what information they had, whether there is a legitimate rationale, and whether any hedging or client facilitation supports it.
- Consider submitting a suspicious transaction and order report under SUP 15.10, and the firm's own SAR to the NCA if money-laundering suspicion arises from the proceeds.
- Consider notifying the FCA of the control failures, and assess whether the corporate broking mandate can continue.
Must not happen.
- No tip-off. Nobody should warn Tom's fellow trainee, the friend at the other bank, or the desk, in terms that could tip them off about a report or investigation. Internal communications should go through compliance with that constraint in mind.
- Tom should not be allowed to 'sort it out' quietly. Instructing him to stay silent while the desk keeps trading would compound the Article 8 breach.
- The firm must not destroy or 'tidy' chat records.
The judgement being tested is that the duty is to escalate and stop the activity, not to investigate first and report later.