On 19 March 2008, the Financial Services Authority (FSA) confirmed that it would be conducting an investigation into trading in HBOS following a sharp fall in its share price. The following statement outlines the background to the FSA investigation into trading in HBOS shares during the period under review and the conclusions reached.
During the recent turbulence in the credit markets, there has been a lot of speculation in the press and elsewhere about banks which might be facing difficulties in obtaining funding. The pessimistic ‘chatter’ amongst commentators heightened after the events which led up to the emergency sale of Bear Stearns during the week ending Friday 15/16 March 2008. Various rumours circulated in the market that a British bank faced funding difficulties. Several of the rumours identified HBOS by name: they contended that the Governor of the Bank of England had cancelled his Easter travel plans in order to resolve a liquidity problem at HBOS; and/or that the Bank of England was “bailing out” HBOS.
Many market commentators speculated, often by reference to allegedly specific e-mails and messages, that the fall in the HBOS share price was the result of unscrupulous traders who spread false rumours to make unjustified profits, having earlier short sold the shares.
On the afternoon of 19 March 2008, FSA staff from Enforcement, Markets, Supervision and Intelligence began to analyse trading in HBOS and to contact market participants and news organisations to determine whether a person or persons might have spread misleading, false or deceptive information regarding HBOS to profit from a reduction in its share price.
During the course of the investigation, FSA staff also interviewed a number of market participants at investment banks, broker dealers and hedge funds including traders, senior management and compliance staff. Market Monitoring team reconstructed segments of the order book, scrutinised trading records relating to HBOS shares and derivative instruments, analysed market transaction data for all HBOS instruments including OTC derivative instruments through centralised transaction monitoring database and reviewed e-mails and messages including taking steps to verify any specific e-mails and messages highlighted by market commentators.
Market Monitoring team also looked at message boards and reconstructed global press coverage of HBOS during the relevant period. This information allowed investigation to view the development of the rumours over time and assess their impact on market sentiment, the market’s response to the rumours and the factors contributing to the movement in the HBOS share price on the day. The investigation has now concluded.
At the time the HBOS rumours circulated there were very uncertain market conditions in relation to the UK banking sector. This, coupled with the news regarding Bear Stearns the previous weekend, meant that traders and other market participants were very actively monitoring their positions in UK banking stocks.
There is no doubt that false and damaging rumours were circulating about HBOS on 19 March 2008 and these would have had some impact on HBOS’ share price. It is difficult, however, to say how much impact, as the share price was also affected by the interaction of a number of other complex factors on the day, including:
– A lack of liquidity in the order book with parties unwilling to enter buy or sell orders, particularly after the automated trading halt; and- The effect of algorithmic trading strategies, which amplified the impact of the initial downward trend in the HBOS share price.
Despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price.