The monitoring room is located on the third floor of the supervisor’s office on the Vijzelgracht. The wall of screens above each desk shows that it is not a normal open office.
On the two rows of three screens, a team of fifteen people monitors trading on the Amsterdam Stock Exchange. The team includes experts with different backgrounds, divided into the different investment categories that AFM supervises.
Four data analysts are also included. The regulator is increasingly working on the basis of data, says Steef Akerboom, capital market manager with responsibility for supervising stock exchange trading.
AFM oversees this trade:
Every day in Amsterdam is there traded for more than 8 billion euros in equities. This is mainly due to Brexit, after which some trade has moved from London to Amsterdam. Before Brexit, this trade was worth 2.3 billion euros. A large part of the bond trade from London also came to Damrak.
In addition, trading in derivatives of CO2 emission rights has also moved to Amsterdam as a result of Brexit. In addition, the supervision of the trade in gas as the most important raw material.
This billion-dollar trade provides data, a lot of data. Because multiple orders are often placed for each trade, by a bank or other type of trader, whether on behalf of a customer. Not every order also results in a buy or sell transaction because stock trading is about supply and demand. The highest bidder buys the stock.
Spotting investors in the amount of data trying to manipulate the market is impossible with the naked eye. The supervisor therefore works with self-programmed algorithms that sound an alarm if deviating price movements are detected.
Started on the trading floor
It’s about outliers. “You want to look at it anyway,” Arthur Bark says. He once started on the trading floor of the Amsterdam Stock Exchange when real physical trading was still taking place with paper tickets and of ‘dealers in colorful jackets’. After a career change, he ended up in AFM about seven years ago.
In practice, this means that Bark and his colleagues as security guards keep an eye on the trade all day. On his screens, he can watch exactly one millionth of a second and act as a kind of video judge of what is happening in the stock market.
Bark also keeps an eye on the news, among other things through the news agencies for specialized services such as Refinitiv. There is also a Bloomberg terminal, an alleged $ 24,000 a year source of useful data for institutions to make decisions based on what is happening in the financial markets.
The business channels CNBC and RTL Z are shown on two TV screens on the wall, and the news agency Reuters is also always in view. “If all kinds of news suddenly comes in, something’s going on,” Bark says. Following the news is mainly aimed at seeing what information is circulating in the world outside of AFM that may affect prices. In addition, messages on social media and internet forums are also looked at.
Alarms for deviant behavior
Usually, Bark, based on his own system, has long been aware that something is going on. “The first trigger comes from the alarm screen.” The system is designed so that it responds if there is suddenly more or different trading in a stock. “Then we will immediately see what happens.”
The alerts are set to specific patterns that may indicate market abuse or tampering techniques, such as layering or spoofing† It is to place buy or sell orders for the purpose of quickly moving the price up or down. Then the manipulator can take advantage of it by taking an opposite buy or sell action and withdraw the manipulative orders.
Duty to report suspected abuse
AFM is primarily dependent on its own alarm system, but also receives BIG reports from market participants about suspicious transactions. STOR stands for Suspicious Transaction and Order Report.
Investment platforms and companies that see a suspicious transaction are required to report this to AFM. Last year, the regulator received 556 of these types of reports. Our own analysis yielded dozens more hints of market abuse on†
Relying solely on the STOR reports is therefore ‘suboptimal’ according to Akerboom. “Only the supervisor sees the whole picture.” Trader signals are useful as part of a larger puzzle of discovering cross-border manipulation, he explains.
An example of price manipulation is pump & dump, says Bark. This means buying a large amount of shares and then subsequently pushing the price ‘up’ with small orders and transactions. This results in an artificial price increase, which increases the value of the share position. It is then quickly sold, with a profit thanks to the manipulation.
If an alarm goes off, it is first checked if there is a logical explanation for it, it does not always have to be market manipulation. “For example, if a competitor has come up with numbers in a different time zone,” Bark says. The price of Dutch companies often also responds to this. Recognizing this requires a kind of carpenter’s eye.
If something turns out to be wrong, the supervisor intervenes. It usually comes down to a phone call to a company whose stock price is going crazy.
This may be due to a person with insider knowledge about, for example, an acquisition buying shares in the company to be acquired in order to take advantage of the price increase when the news of it comes out.
The supervisors have regular contact with the companies under their supervision so that they can act quickly. “It’s great that we can easily call a CEO,” says Bark. “If we then hear that something may be on the way, we will take action.”
If a press release is already ready, the regulator encourages you to send it quickly. This does not even require information about what is going on, but just confirmation that something is going on. You should have such a message ready as a company, if you are working on an acquisition or merger, they will find it at AFM.
If this press release is not issued soon enough, AFM may decide to suspend trading. The supervisory authority does this because every investor must be able to act on the basis of the same (public) information.
Ensuring that all investors can trade on the basis of the same information is one of AFM’s important tasks, says Akerboom. The stock exchange is an important instrument for companies and governments to raise money to invest and therefore important for the Dutch economy as a whole.
Because such a telephone conversation can be a rather tough conversation, AFM works with surveillance according to the four-eye principle, also because two simply know more than one.
Not only are companies being called about what is going on. The supervisors also sometimes call investors when they see that someone is manipulating the price.
“Sometimes we see the manipulation happen live,” Bark says. Through the broker, it is very easy to find out the phone number of such an investor and approach him or her admonishing.
“Nine out of ten times is such a complete shock,” Bark says. “And then it stops right away. ‘Butter for the fish’.” In such a case, ‘often ten-work’ according to Bark, one does not usually start further investigation. “It saves time and money.”
Because investigations are time consuming, the supervisor first tries to warn offenders with a soft (er) hand. It ranges from an informal conversation in the office with explanation of the rules via a warning letter (‘a yellow card’) to the imposition of the fine or statement to the prosecution. “It’s the red card,” Akerboom said.
Before that happens, extensive research needs to be done, including on social media. And it only happens when there is a suspicion that it is about more than dozens of dollars. For example, if someone traded a particular stock for the first time, just before news of that company.
wealth of information
Then it will also be checked whether this Mr A has ties to Mr B, eg via social media. Such a contact could indicate insider trading if Mr B ‘accidentally’ works in the company that was rumored to have been taken over.
The trade data also offers a wealth of information for research. With a few clicks of the button, you can find out who has traded, through which party, for what amount and how many shares. These studies are conducted by a separate team, which also includes legal experts.
About thirty such in-depth studies were started last year. Three of these led to a report to the prosecution. This is not to say that no fines were imposed in the other cases.
Depending on the type of violation, AFM has several options if it wants to tackle people. This can be done through the aforementioned prosecution, which can initiate a criminal investigation on the basis of a report from AFM.
Nice long-term route
Another way is through administrative law. After consultation with the prosecution, AFM can independently impose a fine. These are lengthy procedures because the defendant can also defend himself. And until the court has ruled (or AFM has published the fine), the investigation remains secret.
“We’ll never tell you what we have in the pipeline,” Akerboom said. “We can not say that.”