New NZX market manipulation guidance raised in Warminger trial

Wednesday 28th September 2016

A joint NZX/Financial Markets Authority collaboration on providing more guidance to the securities industry on the scope of permissible trading conduct was raised today in the country’s first market manipulation trial.

Milford Asset Management portfolio funds manager Mark Warminger is accused of breaching securities law that prohibits trading that is not for a genuine commercial purpose and creates an artificial appearance in the market.

Warminger’s counsel Marc Corlett QC asked about the current trading conduct working group when cross-examining NZX’s manager of market surveillance Fraser Wyeth, who confirmed new guidance on market manipulation was being worked on.

NZX’s regulatory agenda 2016 says the objective of the working group is to provide greater clarity to the broker and funds management industries on the parameters of permissible conduct, including highlighting practices that would breach the rules.

This includes the NZX publishing a revised edition this year of its market manipulation guidance note which will provide examples of conduct it considers may be manipulative and measures brokers should implement to ensure compliance with their market manipulation obligations. The NZX wouldn't comment further on the guidance because of the current court case.

Warminger is accused of misusing his privileged position as an institutional investor by placing trades in stocks in one direction to move the price so he could later transact significant off-market sales, known as cross-trading, at a greater profit and setting false and misleading prices in the market. The case brought by the FMA involves 10 trading occasions in 2014.

An application by Warminger’s lawyers for further discovery of NZX participant enforcement memos to be made available to the court was opposed by the FMA.

Chief High Court Judge Geoffrey Venning ruled this morning against releasing most of the documents, arguing they weren’t relevant to this case and were subject to confidentiality restrictions. He said there could be discovery of trading data and transcripts of interviews with potential witnesses and one NZX report relating to one of the 10 causes of action in the Warminger case.

He also made a suppression order banning media reporting on the various brokers involved with the documents.

Corlett’s cross-examination of Wyeth today focused on whether Warminger had been spoken to by the NZX when it first started investigating him in mid-2014 following what it considered unusual trading in Xero shares. Yesterday Wyeth told the court that Warminger's placing of simultaneous buy and sell orders through different brokers, when considered against the effect on the market and other circumstances, created a strong impression of "price-rigging".

Today Wyeth said Warminger hadn’t been spoken to before the NZX market surveillance team referred its inquiry to the FMA because it didn’t want to “tip him off” about potential action.

Warminger worked for an institutional fund manager and traded through brokers, meaning he was not considered a market participant and under the NZX’s disciplinary arm. Fund managers fall under the FMA’s purview under the Financial Markets Conducts Act.

Wyeth said the NZX team had spent seven weeks investigating the matter before making the referral in August 2014, including talking to various brokers involved in the trades.

Warminger often used direct market access (DMA) to real-time trading available to certain clients through broker Macquarie to trade shares anonymously and Corlett asked whether under direct market access, brokers have some responsibility for trades put through under their system.

Wyeth’s reply: “Yes.”

He said NZX’s current guidance note on market manipulation doesn’t mention the use of DMA.

BusinessDesk.co.nz

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