Creation of a floor, or a ceiling in the price pattern

Definition

transactions or orders to trade carried out in such a way that obstacles are created to the financial instrument, with prices falling below, or rising above a certain level, mainly in order to avoid negative consequences deriving from changes in the price of financial instruments. This practice may also be illustrated by the following additional indicators of market manipulation:

(i) transactions or orders to trade which have the effect, or are likely to have the effect, of increasing or decreasing or maintaining the price during the days preceding the issue, optional redemption or expiry of a related derivative or convertible;

(ii) transactions or orders to trade which have the effect of, or are likely to have the effect of increasing or decreasing the weighted average price of the day or of a period during the trading session;

(iii) transactions or orders to trade which have the effect of, or are likely to have the effect of, maintaining the price of an underlying below or above a strike price or other element used to determine the pay-out (e.g. barrier) of a related derivative at expiration date;

(iv) transactions on any trading venue which have the effect of, or are likely to have the effect of, modifying the price of the underlying so that it surpasses or does not reach the strike price or other element used to determine the pay-out (e.g. barrier) of a related derivative at expiration date;

(v) transactions which have the effect of, or are likely to have the effect of, modifying the settlement price when this price is used as a reference or determinant namely in the calculation of margin requirements.

Surveillance

Effective implementation of surveillance alerts for detecting creation of a floor, or a ceiling in the price pattern requires capturing the following data:

  • trade data

  • volume data

  • price pattern over time

  • relevant sensitivities and strike levels from derivatives exposure

Detecting risks related to the creation of a floor or a ceiling in the price pattern requires analysis of intra day price action against trading behaviour. Correlating trading activity, price levels and significant derivative related risk increases efficiency of alerting logic.

It is challenging to design effective alerts when derivative risks are not part of the detection logic. Alternative approaches include monitoring for large volumes in spot markets which trigger manual checks against derivative positions.

Regulatory source

Transactions or orders to trade carried out in such a way that obstacles are created to the financial instrument, a related spot commodity contract, or an auctioned product based on emission allowances, with prices falling below, or rising above a certain level, mainly in order to avoid negative consequences deriving from changes in the price of the financial instrument, a related spot commodity contract, or an auctioned product based on emission allowances — usually known as ‘creation of a floor, or a ceiling in the price pattern’. This practice may also be illustrated by the following additional indicators of market manipulation:

(i) transactions or orders to trade which have the effect, or are likely to have the effect, of increasing or decreasing or maintaining the price during the days preceding the issue, optional redemption or expiry of a related derivative or convertible;

(ii) transactions or orders to trade which have the effect of, or are likely to have the effect of increasing or decreasing the weighted average price of the day or of a period during the trading session;

(iii) transactions or orders to trade which have the effect of, or are likely to have the effect of, maintaining the price of an underlying financial instrument, related spot commodity contract, or an auctioned product based on emission allowances, below or above a strike price or other element used to determine the pay-out (e.g. barrier) of a related derivative at expiration date;

(iv) transactions on any trading venue which have the effect of, or are likely to have the effect of, modifying the price of the underlying financial instrument, related spot commodity contract, or an auctioned product based on emission allowances, so that it surpasses or does not reach the strike price or other element used to determine the pay-out (e.g. barrier) of a related derivative at expiration date;

(v) transactions which have the effect of, or are likely to have the effect of, modifying the settlement price of a financial instrument, related spot commodity contract, or an auctioned product based on emission allowances, when this price is used as a reference or determinant namely in the calculation of margin requirements.

COMMISSION DELEGATED REGULATION (EU) 2016/522, Annex II, Section I, 1 (b)