FSA v Alexander: playing the system, or manipulating the market, asks Simon Goldstone
The Financial Services Authority (FSA) fined Barnett Alexander, a self-employed trader, £700,000 in June for market abuse. Alexander’s scheme was to deal in shares so as to influence the price of derivative “contracts for difference” (CFD’s); he would make a profit on subsequent CFD trades on automated exchanges. The trades were on the open market, with willing participants on the basis of transparent prices.
A CFD is an agreement to exchange the difference in value of a share between the time when the contract is opened and the time when the contract is sold. A trader can agree to buy, then sell, a CFD in XCo if he thinks that the share value will go up; he can sell, then buy, if he thinks the market will fall. You can trade CFD’s without owning the underlying shares—think instead of CFD’s as shadowing the shares. The value of an XCo CFD is directly related to the price at which XCo shares are traded, and to the difference between the price that the
