By Scott Leader, Managing Director, Asia Pacific, Eventus
Market manipulation is a crime but catching crooks takes more than finding fibs online.
In a first, the Australian Securities and Investments Commission (ASIC) secured a ‘pump-and-dump’ conviction for postings on social media in June 2022. Gabriel Govinda, who went by the social handle, Fibonarchery, pled guilty to multiple manipulation charges and is facing a maximum of 10 years in prison for each.
The Fibonarchery prosecution raises the question of how much more online fibbing may be out there that remains unpunished, and even what constitutes manipulation, especially as headline maker, Elon Musk, has run into trouble with market-manipulation accusations over a tweet to take his company, Tesla, private; his abortive bid to buy Twitter, and his musing about the deal online, may yet bring him more trouble. This is clearly a challenge for the authorities: proving stock movements from social feeds or combing through threads to find perpetrators and protect retail investors (those most susceptible to pump-and-dump ploys) is like looking for a needle in a field of haystacks.
What’s more, social media doesn’t have know-your-customer (KYC) requirements and the ubiquity of virtual private networks (VPNs) now makes determining who’s behind a social account, or where they’re posting from, near impossible. Yet stopping this kind of subterfuge is critical.
To catch a thief
Central to the case against Fibonarchery were his own posts in a chat forum where he seemed to brag about his manipulations. Without that “self tip,” Mr Govinda may have remained under the radar, succeeding with subsequent scams. But there’s a much deeper crime that goes along with this kind of market manipulation: wash trading. And in most cases, it may be easier to spot and prove than establishing in court that some frivolous posting is actually the danger.
News reports have played up social media’s role in the Fibonarchery scam but more effective policing starts with basic trade surveillance, like spotting age-old wash trading moves.
In wash trades, an individual or group of conspirators control multiple accounts and conduct trades between them. One account buys assets from another and then sells them back or on to separate controlled accounts. The goal is to conceal ownership, create artificial trading volume and take advantage of other unwitting traders.
Pump-and-dump, or cash-and-trash, scams are notoriously part of wash trading but the activity is also common with money laundering or tax evasion, things financial institutions are already tasked to monitor.
A criminal history
According to reports of the case, Mr Govinda controlled 13 different trading accounts and targeted 20 different listed stocks from September 2014 to July 2015. The details are classic wash trading and nearly identical to those used in the largest market-manipulation case in Singapore’s history, which only recently ended in convictions after close to a decade of investigation.
In each case, manipulators targeted several thinly traded stocks, spreading wash trades over a number of accounts. Also similar is how long they went undetected, with tip-offs emerging largely from the perpetrators’ own missteps.
But wash trading, sometimes called ‘cross trading’ or a ‘money-pass’, is long-recognised and detectable in markets. In fact, with new technology, it should become much more detectable. Despite often hiding behind algorithms or random number sequencing, wash trading leaves identifiable patterns because to be successful, the behaviour needs to be repeated often.
All talk, no trousers
A key problem with using social media as a key to catching thieves is that talking up a stock is not, in and of itself, illegal. Multitudes of trade forums exist, such as r/wallstreetbets of 2021 meme-stock fame, where both serious and speculative conversation transpires; as does intentional misdirection.
People can say whatever they want on these forums, but it’s the actual buying and selling in accounts that demonstrate intention and manipulation.
Parsing what’s intentional misinformation from mistaken facts is also, unfortunately, becoming more and more difficult. Are Elon Musk’s tweets about buying cryptocurrencies—or Twitter itself —a case of market manipulation?
The court of popular opinion hasn’t decided and no regulators have stepped in, so it seems anything is fair game. What matters then is the data.
A digital-age challenge is that exchanges are seeking greater integration and traders—both honest and dishonest—can access different instruments and assets across markets. That makes spotting connected activity all the more vital and difficult. Regulators and exchanges will need to up their technology game to keep up with their criminal targets.
It all comes out in the wash
Mr Govinda’s misdeeds, that we know of, transpired over 2014 and 2015. Social media was still relatively new then and the digitalisation of markets was nowhere near as developed as it is today. In the years since, these technologies have advanced considerably. But the tactic of wash trading is as old, and traceable, as it ever was.
The question then is about what moves markets. Is it fibs in online forums or actual deceptive trading activity?
If Fibonarchery hadn’t bragged about what he was up to, watching social channels wouldn’t have helped in his case. This is why core trade surveillance still works and all financial firms—from private banks to crypto exchanges—need to have it in place. Protecting investors means protecting the markets and the only ones who can do that adequately are market players themselves.
In the digital age, it’s the data, not what you say, that matters. And the data behind wash trades doesn’t lie.
Our Validus solution can help you monitor wash trading patterns – reach out to us to learn more.
Eventus is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.