Market Manipulation

Sanctions for Market Manipulation

Market Manipulation

Market manipulation constitutes a form of market abuse and is strictly regulated under both European Union and Cypriot law. The relevant regulatory framework is primarily established by Regulation (EU) No. 596/2014 of the European Parliament and of the Council, commonly referred to as the Market Abuse Regulation (MAR), as well as Directive 2014/57/EU on criminal sanctions for market abuse.

At the national level, the transposition and implementation of these EU legislative acts are achieved through the following laws:

• Law 102(I)/2016, titled The Market Abuse Law

• Law 136(I)/2016, titled The Law on Criminal Sanctions for Market Abuse

• Law 107(I)/2019, which amends the aforementioned law to ensure more effective compliance with Directive 2014/57/EU.

These provisions aim to safeguard the integrity of financial markets, enhance investor confidence, and deter practices that distort the free formation of prices through artificial or misleading mechanisms.

“Market”

The stock market is a structured network of exchanges, brokerages, and trading venues where investors transact in shares and other financial instruments, representing ownership in publicly listed companies.

Technological advancements have significantly broadened access to these markets, making them widely accessible through the use of applications and e-banking software. Within the European Union, such trading must occur on venues recognized as viable markets under Regulation (EU) No 600/2014 (MiFIR) and Directive 2014/65/EU (MiFID II). These include:

• Regulated Markets (RMs)

• Multilateral Trading Facilities (MTFs)

• Organised Trading Facilities (OTFs)

These classifications ensure trading occurs in transparent, supervised environments that uphold market integrity and investor protection.

What Constitutes Market Manipulation?

Market manipulation constitutes a criminal offense within the framework of market abuse, as defined under Regulation (EU) No. 596/2014 (MAR). Acts that constitute market abuse include the possession and use of inside information, insider dealing, the unlawful disclosure of inside information, and the manipulation of the market through artificial or misleading mechanisms.

Criminal Offences Explained

The most commonly interpreted offences related to market manipulation can be defined in various ways under applicable legislation.

For instance, in matters involving the use of inside information, both Article 7 of Regulation (EU) No 596/2014 and Article 4 of Law 136(I)/2016 stipulate that any disclosure which, if made public, would likely have a significant impact on the market such as information regarding the execution of client orders or any specific data capable of influencing stock prices shall be deemed inside information. Such conduct is punishable under the national laws of each Member State.

In relation to insider dealing, Article 8 of Regulation 596/2014 and Article 13 of Law 136(I)/2016 provide that the possession and use of inside information to acquire or dispose of financial instruments, whether for personal benefit or on behalf of third parties, constitutes an offence. This also includes advising others to engage in such transactions or cancelling or amending orders where the individual should reasonably have known that the action was based on inside information. These acts are considered insider dealing and are subject to penalties under national legislation.

Unlawful disclosure, as defined in Article 10 of Regulation 596/2014 and Article 6 of Law 136(I)/2016, refers to the communication of inside information outside the normal course of employment, where the disclosing party should reasonably have known the nature of the information. Such conduct is classified as unlawful disclosure and is punishable in accordance with the laws of each Member State.

Finally, market manipulation, as outlined in Article 12 of Regulation 596/2014 and Article 9 of Law 136(I)/2016, includes actions such as placing orders or engaging in activities that give or are likely to give false or misleading signals regarding the supply, demand, or price of financial instruments. These actions qualify as market manipulation only when carried out unlawfully. The lawful use of financial instruments may be proactively structured through the implementation of pre-determined trading patterns, typically executed by investment firms. Such conduct, when carried out in accordance with established market practices and regulatory frameworks, is deemed legitimate. Consequently, even where such actions result in collateral misinformation, they do not constitute a breach of applicable market abuse provisions and cannot be deemed unlawful or subject to enforcement by the competent regulatory authority. Additional forms include disseminating false information online, providing misleading data related to benchmarks, and engaging in practices such as wash trades, algorithmic strategies intended to mislead, or expressing opinions on instruments in which the individual holds a position for personal gain. Attempts to fix auctions, including those governed by Regulation (EU) No 1031/2010, also fall within this scope. All such conduct is punishable under the respective national laws of Member States.

Competent authorities

Pursuant to Article 22 of Regulation (EU) No 596/2014 on market abuse, each Member State is required to designate a single administrative authority vested with the necessary powers under national law to ensure the effective enforcement of the Regulation. This authority must be empowered to access and record data related to market activities, request information from any person or market participant deemed relevant to an investigation, conduct on-site inspections, and enter the premises of natural or legal persons where there is reasonable suspicion of a breach of the Regulation. In the Republic of Cyprus, the designated competent authority is the Cyprus Securities and Exchange Commission (CySEC), which exercises these functions in cooperation with the European Securities and Markets Authority (ESMA).

Sanctions for infringement of the Act

In accordance with Article 7 of Directive 2014/57/EU, Member States are required to establish appropriate criminal and financial penalties for infringements of the Market Abuse Regulation. Pursuant to Article 7(2) of the Market Abuse Law of 2016 (Law 102(I)/2016), the Republic of Cyprus has set out a detailed framework specifying the maximum administrative financial penalties that may be imposed by the Cyprus Securities and Exchange Commission (CySEC) for breaches of the Regulation.

For Natural Persons:

• Infringement of Articles 14 & 15 (Market manipulation and unlawful disclosure of insider information)  (€5,000,000)

• Infringement of Articles 16 & 17 (Market abuse and disclosure of insider information)  (€1,000,000)

• Infringement of Articles 18, 19 & 20 (Insider dealing [recommendations, lists, investment plans etc.])  (€500,000)

For Legal Persons:

• Infringement of Articles 14 & 15 (Market manipulation and unlawful disclosure of insider information)  (€15,000,000)

• Infringement of Articles 16 & 17 (Market abuse and disclosure of insider information)  (€2,500,000)

• Infringement of Articles 18, 19 & 20 (Insider dealing [recommendations, lists, investment plans etc.])  (€1,000,000)

Pursuant to the provisions of Law 136(I)/2016, the Cyprus Securities and Exchange Commission (CySEC), as the designated competent authority under Regulation (EU) No 596/2014, is vested with the power to issue orders for the cessation of unlawful market activities, to freeze assets, to issue public warnings identifying the persons involved, to revoke business operation licenses, and to prohibit individuals from exercising managerial or administrative functions in legal entities. In cases of non-compliance with such sanctions, CySEC may impose an administrative fine not exceeding €350,000, and in instances of repeated infringement, a fine not exceeding €700,000.

Pursuant to the provisions of the Market Abuse Law of 2016 (Law 136(I)/2016), specifically Articles 5 [Inside Information], 7 [Unlawful Disclosure], 11 [Market Manipulation], and 12 [Insider Dealing], the judiciary is empowered to impose criminal and financial sanctions for infringements thereof.

Both Natural and Legal Persons

• Inside Information, Market Manipulation and Insider dealings  Imprisonment not exceeding 5 years, sanctions not exceeding €350,000, (or both), and deprivation from all transactions up to 5 years after the judicial decision (transactions prior to the decision of the Court will be allowed). For non-compliance the courts may impose additional sentencing, for imprisonment not exceeding one year and sanction not exceeding €50,000, and deprivation of a further 5 years from all transactions

• Unlawful Disclosure  Imprisonment not exceeding 3 years or sanctions not exceeding €200,000 or both

Definitions

Financial instruments  Transferable securities, money market instrument, units in collective investment undertaking options (ETF’s, Mutual Funds etc.), futures, swaps, forward rates, agreements, derivative contracts (CFD’s), provided that they are traded on a regulated market, MTF or OTF.

Investment Firm  Any legal persons whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities

MTF  Multilateral Trading Facility, refers to a trading venue where multiple parties can buy and sell financial instruments

OTF  Organised Trading Facility, refers to a trading venue where multiple 3rd parties can buy and sell interests in bonds, finance products etc. unlike MTF’s and regulated markets they have the discretionary power to determine how orders are matched and executed

Regulated market  System operated by a government or other organisation which oversees and controls the market’s operation

ETF’s  Exchange Traded Funds refer to a pre-defined basket of bonds, stocks, mutual funds, the most well-known ETF widely used by investors is the S&P

CFD’s  A contract for difference refers to a financial contract where two parties agree to exchange the difference in value between the opening and closing price of an asset, without actually owning the underlying asset

Financial Derivatives  Contracts whose value is derived from an underlying asset, allows for the trade of financial risks without directly trading the underlying asset.

Insider Information  Insider information is usually considered information acquired by being a member of the administrative, management or supervisory bodies of the issuer, having a holding in the capital of the issuer, having access to that information as part of the exercise of employment, and or being involved in criminal activities.