European regulators have stepped up their focus on trading manipulation conduct. The UK Financial Conduct Authority (FCA) along with the European Securities and Markets Authority (ESMA) have in recent years focused their efforts on detecting and pursuing disruptive trading strategies like “spoofing” and cross-market manipulation. Spoofing can take different forms, but typically involves the placing of non–bona fide orders, often of large quantity, on one side of the market while trying to execute a bona fide order on the other side of the market. Once the bona fide order has been executed, the trader cancels the non–bona fide orders quickly. In a cross-market manipulation scheme, traders are alleged to place orders or to trade in one financial product with the intent of impacting the market of a related product or the same product traded on a different venue.
In a speech on 6 February 2020, Mark Steward, the FCA’s Executive Director of Enforcement and Market Oversight, emphasized the need to “avoid fragmentation in [UK and EU] markets which will provide wrongdoers with arbitrage opportunities for misconduct.” In an effort to step up the FCA’s cross-market surveillance and enforcement, he announced the FCA’s new ability “to consolidate the [FTSE 300] order book so we can aggregate orders in the same stock across different platforms.” Similar efforts have been put forward by the FCA’s counterpart on the European continent. Following a request by the European Commission, on 3 October 2019, the ESMA published a Consultation Paper on Market Abuse Regulation (MAR) addressing this type of conduct. Among other topics, the Consultation Paper discusses the possibility of establishing an EU framework for cross-market order book surveillance in relation to market abuse.
Early cases of enforcement of cross-market manipulation and spoofing cases by UK and US authorities provide guidance in evaluating future matters.
FCA v Da Vinci Invest Limited
In 2015, the High Court of Justice in London imposed penalties and awarded injunctions against five defendants for alleged spoofing that had taken place in 2010 and 2011. The defendants included companies and traders associated with Da Vinci Invest Limited.
The FCA’s investigation found a total of 1,862 suspicious incidents, amounting to approximately 97 per cent of the defendants’ gross profit. Figure 1 illustrates an example of one such incident. It shows the UK-based London Stock Exchange (LSE) order book and transactions for the stock of Aquarius Platinum Limited (AQP) from a period when alleged layering and spoofing activity described by the UK’s High Court occurred (6 December 2010 between 11:00:00 and 11:45:00 UTC). The conduct of the defendants caused an obvious pattern to the market of AQP, which the High Court called a “saw-tooth pattern.” Around 11:09 a block of blue (indicative of relatively small orders) underneath a large block of orange and red (indicative of large orders) appears close to the market midpoint on the sell side. Shortly after this block of blue disappears, and after an increase in the price of AQP, a large block of blue appears on the buy side, seemingly pushing up the price of AQP further. When this block disappears from the buy side, another block of blue underneath a large block of orange and red appears close to the midline on the sell side. This pattern repeats another five times, while defendants submitted and executed genuine orders on other European equity venues that had listed the same stock and whenever the prices across the different platforms had moved in a favourable direction.
In the Matter of: Michael D. Franko
In September 2018, the US Commodity Futures Trading Commission (CFTC) settled charges against Victory Asset Inc. (Victory) and Michael D. Franko (Franko) for spoofing and cross-market manipulation in US and UK markets. The CFTC imposed civil monetary penalties on Victory and Franko of $1.8 million and $500,000, respectively. During the period of the alleged manipulative conduct, Franko was employed by one of Victory’s predecessor entities.
According to the CFTC, the cross-market scheme involved “spoofing in one market to benefit a position in another market, where the price of the two markets is generally correlated, particularly in the short term.” The CFTC found that Franko placed a relatively small bid or offer with the intent to execute that order in one market (e.g., on a US commodities exchange) and then, prior to the execution of the bona fide order, placed a larger order in a different market (e.g., on a UK commodities exchange) “with the intent to cancel that order before execution.” For example, the CFTC determined that Franko placed one or more non–bona fide orders in copper futures on the UK-based London Metal Exchange (LME) to benefit a genuine order that he had placed in copper futures on the US-based Commodity Exchange (COMEX), a designated contract market that is part of the CME Group, “taking advantage of the correlation in price between these markets.”
Figure 2 illustrates the pattern described by the CFTC for Franko’s trading in LME copper futures. Around 13:23:46 UTC, 100 contracts were placed on the LME at the second best bid of $7,277.25. According to the CFTC, shortly before placing the bid order for 100 contracts on the LME, Franko placed two sell orders of 11 contracts each on COMEX. The two sell orders were “iceberg orders that only showed to the market as one lot.” The two sell orders were fully and partially filled, respectively, while the bid order of 100 contracts was outstanding on the LME.
The concurrent market activity on COMEX is shown in Figure 3. In particular, the order book on COMEX shows an upward movement of one price level approximately concurrent to the upward movement on the LME. Figure 3 also shows executions that fit the trading pattern described by the CFTC.
Regulatory surveillance functions and capabilities are evolving to monitor for market abuse risks spanning multiple contracts and products across separate trading venues, and capturing different types of abusive trading. While the landscape of abusive trading prosecutions and enforcement actions in the EU and UK is evolving, recent actions taken by regulators signal the commitment to continue law enforcements’ focus on spoofing and cross-market manipulation in the broader enforcement of general market abuse regulation. In the Da Vinci and Franko matters, the traders employed similar trading strategies (entering of allegedly non–bona fide orders in one market to affect genuine orders in another) across multiple, highly correlated venues and instruments. Thus, these matters provide insights and guidance relevant for evaluating future cross-market manipulation enforcement investigations.
 Greg Leonard is a vice president at Cornerstone Research in London. Marlene Haas is a manager at Cornerstone Research in Washington, D.C. The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research or any of its clients.
 Some of the rules and regulations described herein were enacted by the FCA’s predecessor, the UK Financial Services Authority (FSA), which was responsible for the regulation of the financial services industry in the UK between 2001 and 2013. For the purposes of this publication, we will refer to the FCA even if a rule, regulation, or guidance was enacted by the FSA. This is in accordance with how the FCA is referring to publications by its predecessor.
 “Consultation Paper – MAR Review Report,” ESMA, 3 October 2019, https://www.esma.europa.eu/sites/default/files/library/mar_review_-_cp.pdf.
 England and Wales High Court Decision, FCA v. Da Vinci Invest Ltd  EWHC 2401 (Ch), 12 August 2015 (“High Court Judgment”).
 Those defendants were two companies that at the relevant time belonged to the same group headed by Da Vinci Invest Limited (“DVI” and “DVPte”), three traders, and a Seychelles company, Mineworld, which was owned and controlled by the traders and used as a vehicle for derivatives trading on their own account. The Singaporean company DVPte was dissolved and held no assets at the time of the trial. As a consequence, the FCA did not proceed with the case against it. See High Court Judgment.
 High Court Judgment, p. 135.
 “CFTC Orders Futures Trader and Trading Firm to Pay $2.3 Million in Penalties for Cross-Market and Single-Market Spoofing and Manipulative Scheme,” CFTC, 19 September 2018, https://www.cftc.gov/PressRoom/PressReleases/7796-18 (“CFTC Victory/Franko Press Release”).
 CFTC Victory/Franko Press Release.
 CFTC Victory/Franko Press Release.
 CFTC Victory/Franko Press Release.
 Order Instituting Proceedings Pursuant to Section 6(c) and (d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions, In the Matter of: Michael D. Franko, CFTC Docket No.: 18-35, 19 September 2018 (“CFTC Order”), p. 3.