In recent months regulators have increased their focus on detecting and reporting possible incidents of market abuse. In Europe trading firms are expected to check for potential offences and report their suspicions to the regulator. As part of the MAD Review, the current list of indicators for market abuse will be promoted from a Level 3 document to the newLevel 1 regulation text, cementing the shift in focus. Additionally, ESMA is consulting on a number of new indicators for the Level 2 text.

While some of the new signals come as no surprise – high order-to-trade ratios, for example – others, such as “smoking” appear to be rather awkward. According to ESMA, the trading practice of smoking describes the “posting of alluring limit order…to attract slow traders”. What this actually means in terms of day-to-day operation is unclear. The activities of oil market speculator Michael Coscia (found guilty of market abuse earlier this year) are unlikely to be considered smoking because the whole incident of abuse, including the response by the ‘lured victim’, took place within 609 milliseconds. Incredibly fast in human terms, but an eternity for some HFTs. Besides, is any order that decreases the spread ‘alluring’? If that was the case, there would be an awful lot of potential market abuse going on. Let’s hope that the on-going consultation process brings some clarity before the markets are designated smoke-free zones.