By: Joseph Schifano, Global Head of Regulatory Affairs, Eventus
FINRA recently alerted members to an emerging threat: “pump-and-dump-like” schemes against thinly-traded initial public offerings (IPOs). The behavior that FINRA, NASDAQ, and NYSE have all observed includes a bad actor manipulating the price of a small-cap IPO to inflate the price (pump) and then profit by selling to unsuspecting victims in the open market (dump). This tactic is sometimes called “ramp-and-dump” in other jurisdictions. For example, see here for related guidance from regulators in Hong Kong.
The boiler room tactics of years past have made way to new schemes, like “pig butchering” whereby the scammer exploits the victim’s financial or emotional vulnerabilities. As FINRA warns,
“schemes are evolving and members should pay close attention to suspicious trends in the marketplace and how they may affect members’ obligations. FINRA encourages members to continuously evaluate and adapt their supervisory systems as well as compliance and risk management programs to ensure that they are monitoring for and addressing this threat.”
All this means members should be thoughtful across multiple processes to counter the evolving methods of bad actors. Many of these defenses relate to governance of underwriting securities as “gatekeepers to the public markets.” Another set references the role of member firms in monitoring both individual and broker-dealer clients. Underwriters and member firms with client accounts can look at fairly direct signals for review, like geographic location of the client, the percentage of ownership in the float deposited in the account, the concentration of allocation of shares, etc. But this is only one part of the story.
To execute the “dump” end of the scheme, unsuspecting victims must be tricked into buying the inflated shares. This is where the tactics have changed over time, with the latest coming through multiple social media scams. For “pig butchering,” scammers gain the victims’ trust via social media and ultimately convince them to deposit money in a bogus account or to directly purchase the inflated security. The difficulty is that a FINRA member firm does not have a direct method to detect the scam at that point, it must instead use constantly evolving transaction monitoring and trade surveillance methods.
What can a firm do to detect continuously emerging schemes through trade surveillance and transaction monitoring?
FINRA provides a few relevant areas for firms to consider as they calibrate trade surveillance and transaction monitoring tools to detect problematic activity through inference and anomaly detection. These include looking for:
- multiple customers or accounts placing layered buy limit orders at or around the IPO price
- Frequent odd-lot amounts or other “red flags” of pre-arranged or coordinated trading
- Liquidation of large amounts of shares at peak prices
- No trading by an account until peak prices
- Spikes in prices that do not appear to be driven by news or material events
Critically, this is not an exhaustive list and firms should continuously pay close attention to suspicious trends and activity as FINRA suggests.
ViP: Validus maintains a collection of trade surveillance procedures dedicated to monitoring for short term, sharp price movements combined with transaction monitoring tools that monitor account activity, which when combined, can detect pump-and-dump-like activity generated through “pig butchering” or other more classic methods. While some alerts can detect specific behaviors, the power of automation in Validus allows users to customize groupings of alerts to better detect anomalies and provide tools for analysts to manage multiple indications of problematic behavior.
About Eventus
Eventus is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.