Bank of Russia establishes facts of market manipulation by clients of market makers in certain eurobonds
The Bank of Russia has established facts of market manipulation by clients of professional securities market participants who participated in the open market-making programme in certain eurobonds under the auspices of PJSC Moscow Exchange (up to 19 December 2016, CJSC MICEX Stock Exchange). This programme was implemented since September 2015 until April 2017. It was aimed at increasing the availability of on-exchange transactions with eurobonds for retail investors.
During the whole time when this programme was in effect, there were established pairs of market-maker customers who conducted coordinated transactions in eurobond markets that resulted in a significant deviation in the trading volume of such eurobonds.
These pairs included:
GTCP TRADING LTD and GorTec Management Ltd — operations over their accounts were conducted by a trading robot developed by Aleksei S. Dokuchaev for market-making purposes;
Mikhail Yu. Chirkov and Yury V. Chirkov, whose account was managed by Mikhail Yu. Chirkov;
IT INVEST FINANCIAL SOLUTIONS (CYPRUS) LTD and the following persons and entities who changed over time: OJSC MMTB, Aleksandr V. Khokhrin, DA VINCI CAPITAL INVESTMENTS (CY) LTD. Orders to conduct transactions with eurobonds were placed on behalf of OJSC MMTB and Aleksandr V. Khokhrin by Ivan A. Timoschenko, a leading specialist of the brokerage operations department at JSC IC IT Invest (a market maker for its clients, including IT INVEST FINANCIAL SOLUTIONS (CYPRUS) LTD and its counterparties). The information received during the inspection shows that Ivan A. Timoschenko himself determined the time and price when and at which to place orders on behalf of Aleksandr V. Khokhrin and OJSC MMTB.
The law stipulates that only trading participants can act as market makers. That said, trade organiser allows market-making responsibilities to be fulfilled through executing orders of customers of such professional securities participants. Thus, participants of the above-mentioned open market-making programme delegated their responsibilities to their brokerage customers. These customers, in turn, in order to receive the corresponding reward under market-maker services agreements, regularly performed transactions with their established related counterparties ensuring fulfilment of the obligatory parameter ‘Minimum sufficient amount of passive deals of a market maker during a trading day’. This way, outside investors were misinformed about the volume and liquidity of markets of such eurobonds.
Operations of market-maker clients that ensured that the former complies with the requirements of the open market-making programme under the auspices of PJSC Moscow Exchange with respect to certain eurobonds to receive monetary reward are not subject to exceptions stipulated in Part 3 of Article 5 of Federal Law No.
The activities over the accounts of the above-mentioned market-maker customers that resulted in significant deviations of eurobond trading parameters are classified as market manipulation under Clause 2 of Part 1 of Article 5 of the Federal Law. Thus, the activities over the accounts of Mikhail Yu. Chirkov, Aleksandr V. Khokhrin with participation of Ivan A. Timoschenko, GTCP TRADING LTD and GorTec Management Ltd with participation of Aleksei S. Dokuchaev, IT INVEST FINANCIAL SOLUTIONS (CYPRUS) LTD, DA VINCI CAPITAL INVESTMENTS (CY) LTD from 16 March 2016 to 25 April 2017 with respect to GAZPR-34, PGIL-20, PSB Fin-7, Veb-23, CBOM Finan, VEB FIN-25, VEB-20, RUS-30, RUS-28, BIN-19, PSB Fin-9, CBOM-18, RUS-18 and Sistema-19 eurobonds violate the ban imposed by Part 2, Article 6 of the Federal Law.
Similar activities over the accounts of market-maker customers that did not result in a substantial deviation of eurobond trading parameters cannot be formally classified as market manipulation. At the same time, the Bank of Russia considers these activities to be financial market misconduct.
In view of the above, market-making responsibilities taken on by participants of the open market-making programme with respect to certain eurobonds and delegated by them to their customers were fulfilled with a violation of standards of professional conduct of financial market participants and in a number of cases entailed a gross violation of the requirements of Russian laws.
To prevent such actions in future, the Bank of Russia has sent orders to persons involved in market manipulation in organised trading of the above-mentioned eurobonds.
The Bank of Russia recommends that PJSC Moscow Exchange take action to establish the necessary level of control over the compliance by market-makers with their obligations. This will help prevent unscrupulous financial markets participants from using market making to cover their illegal activities. The Bank of Russia, in turn, will continue improving the institute of market-making.
Earlier, in its Information Letter No. IN-06-59/53, dated 07 August 2018, on the participation of individuals in the activity of trading participants as market-makers, the Bank of Russia drew attention of financial market participants to the fact that such practice would not be tolerated.
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