Prohibition of market manipulation: Algorithms and High Frequency Trading (HFT)

Magnus Bloch Thomsen & Simon Lauge Olsen

Student thesis: Master thesis


This thesis focuses on the new financial reality and market manipulation. The financial markets have changed dramatically during the past decade. Trading on the stock exchange has moved from traditional trading with human intervention to the use of complex pre-programmed algorithms operating at high speed – named High Frequency Trading (HFT). Some scholars are of the opinion that HFT has positive influence on markets, providing both liquidity and lowering bid-ask spreads. At the same time, HFT does have a lot of critics, due to the high risk and unpredictability. Furthermore, HFT has been found guilty by the public of causing the famous Flash Crash back in 2010. This new financial reality also provides new forms of market manipulation by which the European Commission has increased focus on High frequency trading in the Market Abuse Regulation (MAR). This thesis has three contributions to the prohibition of market manipulation in the MAR in the context of HFT. Firstly, the objective scope on market manipulation is broad due to its effect-based approach. The definition of market manipulation includes both the manipulative strategies and those strategies with manipulative effects, notwithstanding the intention with the strategies. Furthermore, the subjective element in the prohibition must also be fulfilled before a violation of the prohibition occurs. It is found that traditional liability standards pose a difficulty in relation to the applicability on HFT. Secondly, it is found from a law and economics perspective that the rules on market manipulation does not provide the HFT market participants with efficient incentives compared to their behavior. Thirdly, it is proven that a strict liability standard as an alternative solution does not constitute a Kaldor-Hicks improvement. This is due to the fact that a strict liability in this situation provides too many damaging consequences in the financial market. The last part of the thesis discusses a greater responsibility on the stock exchanges in relation to market manipulation with HFT technology. The stock exchanges are in an efficient position to take this responsibility due to improvements in artificial intelligence and machine learning. Maybe new technology will solve the problem with the new form of market manipulation.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2018
Number of pages114
SupervisorsPeer Schaumburg-Müller & Caspar Rose