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The Concept of Defining and Combating Market Manipulation in Existing and Proposed EU Legislation

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Regulating Corporate Criminal Liability

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Abstract

Market Manipulation is sometimes labeled as a “virtual term of art”. This expression shows how difficult it is to define what kind of market practices are market manipulation. This difficulty is strictly connected with the issue of legislative decisions what behavior should be treated as manipulation. The problem derives from the thin border between aggressive but legal behavior and market manipulation. To determine the border one should not forget that the essence of functioning of capital markets is speculation, which I understand as a rational behavior of market participants.

One aim of this contribution is to show how the EU legislator coped with the challenge in the Directive 2003/6/EC on insider dealing and market manipulation. The EU legislator assumed that the most effective way to combat market manipulation was to define it in an objective way. It raises the question whether it is possible to define manipulation this way—and whether the EU legislator succeeded.

The second section of this chapter focuses on current draft EU regulations against market manipulation. The EU Commission, after public consultation on the review of the Market Abuse Directive (MAD) (Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), OJ L96/16), tabled evaluations of contemporary regulations against market manipulation. The lack of clarity and thus legal certainty was pointed as one of the main disadvantages of the existing framework. Therefore, this warrants the question whether the EU commission proposals for a new framework solve the problem of legal clarity and legal certainty.

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Notes

  1. 1.

    Avgouleas (2005), p. 104.

  2. 2.

    Avgouleas (2005), p. 244.

  3. 3.

    Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions, OJ L126/1.

  4. 4.

    Council Directive 89/298/EEC of 17 April 1989 coordinating the requirements for the drawing up, scrutiny and distribution of the prospectus to be published when transferable securities are offered to the public, OJ L124/8.

  5. 5.

    Council Directive 89/592/EEC of 13 November 1989 coordinating regulations on insider dealing, OJ L334/30.

  6. 6.

    Maloney (2003), pp. 811ff.

  7. 7.

    Salinger (2005), pp. 725ff.; Wójcik (1998), pp. 162ff.; Romanowski (1999), pp. 875ff.; Kuciński (2000), pp. 127ff.

  8. 8.

    Factors which shall be taken into account by competent authorities of member states when assessing whether they can accept a particular market practice are stipulated in Art. 2 of the Commission Directive 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards accepted market practices, the definition of inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers’ transactions and the notification of suspicious transactions (OJ L 162/70).

  9. 9.

    Avgouleas (2005), p. 131.

  10. 10.

    More about the control over the market see: Blachnio-Parzych (2011), pp. 122ff.

  11. 11.

    See also: Friedman (1990), pp. 34ff.; McBride Johnson (1981), pp. 730f.

  12. 12.

    Tversky and Kahneman (1974), pp. 1124ff.

  13. 13.

    Fischel and Ross (1991), pp. 503ff.

  14. 14.

    Fischel and Ross (1991), pp. 510, 516ff.

  15. 15.

    Kuciński (2000), p. 122; Zawłocki (2002), p. 99; Budzeń (1996), p. 5.

  16. 16.

    More attempts to define the term artificial price are resented in Avgouleas (2005), pp. 108ff; Blachnio-Parzych (2011), pp. 203ff.

  17. 17.

    Romanowski (1999), p. 873.

  18. 18.

    Easterbrook (1986), p. 118.

  19. 19.

    Easterbrook (1986), p. 118; Cox et al. (1997), p. 656; Rider et al. (2009), pp. 101f.

  20. 20.

    United States Court of Appeals, 7th Cir, judgment of 14 Jan 1953, Great Western Food Distributors, Inc. v. Brannan, 201 F 2.d 476.

  21. 21.

    Siems (2007), pp. 19ff.

  22. 22.

    Staikouras (2008), p. 803.

  23. 23.

    Nevertheless, some continental legal systems implemented Art. 1 (2) (a) MAD into domestic law and penalized it as a crime. See Art. 39 (2) (1) and (2) Act on Trading in Financial Instruments of 29 July 2005, unofficial translation: http://www.knf.gov.pl/en/regulations/Capital_Market/index.html/ (12.2.2014).

  24. 24.

    Avgouleas (2005), p. 130.

  25. 25.

    Avgouleas (2005), p. 129.

  26. 26.

    Aforementioned Art. 11 MAD states that each member state shall designate a single administrative authority competent in supervising the adoption of the Directive and other regulations and shall establish effective consultative arrangements and procedures concerning possible changes in national legislation. These arrangements may include consultative committees, the membership of which should reflect the diversity of market participants.

  27. 27.

    Majewski (2001), p. 20.

  28. 28.

    Haładyj (2008), p. 121.

  29. 29.

    Haładyj (2008), p. 121.

  30. 30.

    OJ L 339/73.

  31. 31.

    Commission Staff Working Paper: Executive summary of the impact assessment, Brussels 20 October 2011, http://ec.europa.eu/internal_market/securities/docs/abuse/SEC_2011_1218_en.pdf (12.2.2014).

  32. 32.

    On 25 July 2012 the EU Commission adopted amended proposals for the Drafts.

  33. 33.

    Treaty on the Functioning of the European Union, amended by the Lisbon Treaty.

  34. 34.

    The clause in Art. 1(2) a MAD which states: “(…) unless the person who entered into the transactions or issued the orders to trade establishes that his reasons for so doing are legitimate and that these transactions or orders to trade conform to accepted market practices on the regulated market concerned”.

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Author information

Authors and Affiliations

  1. Institute of Law Studies, Polish Academy of Science, Warsaw, Poland

    Anna Blachnio-Parzych

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  1. Anna Blachnio-Parzych
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Correspondence to Anna Blachnio-Parzych .

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Editors and Affiliations

  1. Faculty of Law, LMU Munich, Munich, Germany

    Dominik Brodowski

  2. ROXIN Rechtsanwälte LLP, München, Germany

    Manuel Espinoza de los Monteros de la Parra

  3. University of Fribourg, Fribourg, Germany

    Klaus Tiedemann

  4. Faculty of Law, LMU Munich, Munich, Germany

    Joachim Vogel

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Blachnio-Parzych, A. (2014). The Concept of Defining and Combating Market Manipulation in Existing and Proposed EU Legislation. In: Brodowski, D., Espinoza de los Monteros de la Parra, M., Tiedemann, K., Vogel, J. (eds) Regulating Corporate Criminal Liability. Springer, Cham. https://doi.org/10.1007/978-3-319-05993-8_13

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