Outlook: Exchange fines

HE DISCLOSURE by the London Stock Exchange that Morgan Stanley and ABN Amro have been fined pounds 350,000 for "acts of misconduct" begs more questions than it answers. Beyond the bare announcement there was complete radio silence from all parties concerned save for a statement from Morgan Stanley that served merely to hinder understanding.

What we do know is that the fines resulted from Morgan Stanley and ABN Amro taking instructions from a US fund manager to move the price of a security. We also know that an ABN Amro trader was fired in January after the firm had been told of irregularities in trading by the Securities and Exchange Commission.

But beyond that, nobody is saying very much. We do not know the identity of either the US fund manager or the company whose shares were being traded. We do not know if it knows its shares were being traded. We do not know what the purpose was of seeking to move the price of the security or whether it was successful. Nor do we know whether the behaviour which led to the fines caused anybody any loss.

Finally, we do not know whether the trades in question took place off the market or through the Exchange's much-criticised Sets electronic share dealing system, which has been open to abuse in the past.

We do know, however, that we are not supposed to call it market manipulation or Morgan Stanley will get very uppity. We also know that Morgan Stanley has chosen not to dismiss anybody which seems mighty strange given that the fines are the second highest ever handed down by the authorities.

It appears that the catch-all clause in the Exchange's rule book covering acts of misconduct may have been been used because the attempts to move the price of the security involved (see above) ended in failure.

It is worrying that London is hiding behind the cloak of the SEC's continuing investigations to defend its extraordinary lack of candour about this affair.

But it is reassuring at least to know that the Exchange's artificial intelligence systems picked up the trades involved and that the two member firms took their punishment like men - even though fines of pounds 150,000 and pounds 100,000 respectively are mere pin pricks for the likes of ABN and Morgan Stanley.

There are those who argue that over-zealous regulation of London's financial markets will deter business from coming here. But the lesson of this case, in as much as one can be divined, is that London's reputation is more at risk from the behaviour of its participants.

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