About Unfair Trading (Market Manipulation/ Insider Trading)

The following types of trades are expressly prohibited as unfair trades in the Financial Instruments and Exchange Act (FIEA).
The Market Surveillance and Compliance Department closely monitors the market on a daily basis, investigating and examining suspicious trading activity.

Insider Trading

Insider trading refers to the selling or buying of securities (stocks, derivatives, etc.) of a listed company by investors (individuals or legal entities) with access to non-disclosed material information about the company. Insider trading is prohibited by Articles 166 and 167 of the FIEA.

When this kind of trade occurs, general investors do not have access to this information and are put at an unfair disadvantage. This may result not only in unexpected losses but also cause investors to lose confidence in the overall reliability of the market.

In order to prevent this from occurring, the Market Surveillance and Compliance Department examines all cases when listed companies disclose important corporate information, such as the issuing of stocks, insolvency, mergers, capital decrease, and account settlement. The department confirms the details of this information and analyzes the buying and selling patterns in the market.

Market Manipulation

Market manipulation is unfair trading which uses information in the market. For example, this includes any effort to obtain unfair gains by deliberately altering the market to form prices in an unnatural way. This is done in a manner such that it appears as if the market were being subject to the natural laws of supply and demand.

Similar to insider trading, market manipulation is an unfair act which may have an unexpected negative impact on other investors.

For this reason, the Market Surveillance and Compliance Department conducts market surveillance for market manipulation. It establishes certain distinct criteria, based on which it selects a wide variety of trading activity to analyze, such as stocks with sudden price or trade volume increases, stocks with a large influx of buy orders. If necessary, it conducts further examination.

FAQ on Market Manipulation

Types of trades that could lead to unfair trading

JPX-R monitors certain types of trades or orders that we consider could lead to unfair trading such as market manipulation. Examples include:

 

Spoofing

The current price of a certain stock is JPY 500, but Investor A wants to sell his stocks at as high a price as possible. To achieve this:

1. He makes it look like there is healthy buy interest in the stock by placing 400 units of spoof buy orders (orders which he has no intention of executing) ranging from JPY 496 to JPY 499. He also places a sell order of 10 units at the higher price of JPY 505.
2. This series of buy orders misleads others into buying stocks, thinking that the stock price will go up. This enables Investor A to sell his stock at the higher price of JPY 505.
3. Then Investor A cancels the unnecessary buy orders.

POINT: We see "spoof" orders which the trader has no intention of executing as acts which could lead to unfair trading, and therefore monitor them closely.

Spoofing before the opening auction

The expected matching price before the opening auction is JPY 500, but Investor A wants to sell her stock at as high a price as possible. To achieve this:

1. She raises the expected matching price to JPY 505 by placing 100 units of a "spoof" market buy order (an order which she has no intention of executing) before the opening auction. She also places 10 units of a sell order at JPY 505, JPY 5 higher than the original expected matching price.
2. Investor A's market buy order (a spoof order) misleads others into buying the stock, thinking that the stock price will go up. Investor A then cancels the unnecessary market buy order immediately before the opening auction.
3. This enables Investor A to sell her stock at JPY 505 at the opening auction.

POINT: We consider "spoof" orders which the trader has no intention of executing and acts with the intention of fluctuating the expected matching price as acts which could lead to unfair trading, and therefore monitor them closely.

Spoofing intended to discourage orders

The price of a certain stock is JPY 500, but due to another investor's hikenari order (a market order to be executed at the closing auction), the expected matching price at the closing auction is expected to rise to JPY 505. Seeing this, Investor A:

1. Artificially keeps the expected matching price at the closing auction at the current price of JPY 500 by placing 100 units of a "spoof" hikenari order (an order which he has no intention of executing). This puts other investors off placing orders. Investor A buys 10 units of the stock at the current price, JPY 500.
2. Investor A then corrects his spoof hikenari sell order of 100 units to 10 units, and the expected matching price at the closing auction goes up to JPY 505 again.
3. This enables Investor A to sell his 10 units of the stock at the higher price of JPY 505.

POINT: We consider "spoof" orders which the trader has no intention of executing and acts which are intended to fluctuate the expected matching price as acts which could lead to unfair trading, and therefore monitor them closely.

Other

Insider trading, market manipulation and other actions which may have a potentially negative impact on investors and cause them to lose confidence in the market are prohibited by laws and regulations.

Examples of this kind of action are: inappropriate endorsements of specific securities for purchase or sale, exploiting accounting periods with the intent to raise the price of a security at the credit or account settlement date, or any purchases, etc. made by an underwriter for their own account for any reason not consistent with stabilizing the market in accordance with the FIEA.

The Market Surveillance and Compliance Department establishes standards to identify these types of activity. The department then targets the securities that fall under these standards for surveillance and analyzes aspects such as buying and selling patterns.