Compliance & Regulation Part II

What is Cornering the Market?

is when a trader buys most of a product and also holds long positions (contracts to buy it later→ so people must deliver or settle in cash). Other sellers who must deliver the product can’t find any, so they’re forced to buy it from the trader at a high price.

What are the main types of market manipulation?

1. Cornering the Market

2. Squeezing the Market

3. Collusion & Price Fixing

4. Spoofing

5. Layering

6. Wash Trades

7. Banging the Close

8. Insider Trading

What is Squeezing the Market?

Exploiting a natural shortage in supply when open interest is high, pushing prices up artificially.

What are Collusion & Price Fixing?

Competitors agree to set prices or limit output, removing competition and distorting true market pricing.

What is Spoofing?

Placing fake buy/sell orders without intending to execute them to mislead the market.

What is Layering?

A form of spoofing where fake orders are placed at multiple price levels to give a false sense of market volume

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What are Wash Trades?

Buying and selling the same asset at the same price between accounts with the same beneficial owner to create fake volume or activity.

What is Banging the Close?

Placing aggressive trades during the closing window to manipulate the official closing price of an asset.

What is Insider Trading?

Using confidential, non-public information to trade or advise others before that information becomes public, creating an unfair advantage.

Can changing or canceling a trade be insider trading?

Yes. Using inside info to change or cancel orders is also illegal.

What laws apply to market behavior in Europe?

Mainly MAR (Market Abuse Regulation) and MiFID II.

What types of trade sanctions exist?

Quotas – Limits on how much can be traded
Tariffs – Extra taxes on goods
Non-tariff barriers – Rules or licenses
Asset freezes – Blocking money or property
Embargoes – Full bans on trade

What is market manipulation?

It’s doing something that gives a false idea of price, demand, or supply, or sets prices at an artificial level.

Does the manipulation need to work to be illegal under EU law?

No. Just trying to manipulate the market is enough to break the law.

What makes information “inside information”?

1. It's not public: The news hasn’t been shared yet (no press release, no official announcement).

2. It affects the price: If people knew it, the price of the stock or contract would likely go up or down.

3. You got it from a private source: You heard it at work, from someone close to the company, or from someone who shouldn’t be sharing it.

4. It hasn’t been officially released: The information is still private and not known by everyone in the market.

Can changing or canceling a trade be insider trading?

Yes. Using inside info to change or cancel orders is also illegal.

Is giving tips based on inside info illegal?

Yes. Telling someone else to trade on inside info is insider trading too.

What should you do if you're not sure the info is inside info?

Ask compliance before doing anything.

What laws apply to market behavior in Europe?

Mainly MAR (Market Abuse Regulation) and MiFID II.

What is the “recklessness standard”?

You can be punished even without intent, if your actions were careless and could cause harm."You should have known better, and you chose not to check."

What is a block trade?

large, privately negotiated transaction involving a significant quantity of a financial instrument (like stocks, bonds, or commodities), typically executed off-exchange to avoid moving the market price.

What are the compliance rules around hedging a block trade?

1. No hedging before the trade is confirmed (unless allowed by the client).

2. Keep the trade info confidential – no insider trading.

3. Document everything – time, approvals, purpose.

4. Don’t move the market unfairly when hedging.

5. Follow internal and regulatory rules for approvals and reporting.

What is an EFRP (Exchange for Related Position) ?

is a private trade between two parties that includes:

1. A futures or options contract, and

2. A related real-world position (like a physical commodity, a swap, or an over-the-counter (OTC) deal).

Both parts are traded at the same time, and the deal must be:

• Fairly matched (same quantity and risk),

• Properly documented, and

• Reported to the exchange for clearing.

👉 Even though it's done off the main market, it still follows exchange rules to stay legal and transparent.

What are the main types of EFRPs?

EFP (Exchange for Physical): Futures contract is traded in exchange for the actual physical commodity or a forward contract on it.
Example: COMEX Gold futures vs. physical gold.
EFR (Exchange for Risk): Futures contract is traded in exchange for an OTC derivative or swap with similar risk.
Example: Jet fuel futures vs. an OTC jet fuel swap.
EOO (Exchange of Option for Option): A listed option is exchanged for a similar option contract that’s traded OTC.
Example: WTI crude oil option vs. OTC option.

Are EFRPs legal?

Yes, they are legal and commonly used in commodity and derivatives markets. However, they must be:

• Properly documented,

• Reported to the exchange, and

• Cleared like any other trade.

This ensures the trade is transparent, fair, and not used to hide manipulation or risk.