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Malaysian Banking Law – Market Manipulation in the Wholesale Financial Market
Introduction
The integrity of Malaysia’s financial system depends heavily on fair and transparent market practices. Market participants must not engage in activities that distort prices, create artificial market conditions, or mislead other participants regarding the true state of the market.
To preserve confidence in the financial system, section 141 of the Financial Services Act 2013 (FSA 2013) and section 153 of the Islamic Financial Services Act 2013 (IFSA 2013) prohibit various forms of market manipulation in the money market and foreign exchange market. These provisions are further reinforced by the Code of Conduct for Malaysia Wholesale Financial Markets issued by Bank Negara Malaysia (BNM).
Market manipulation is regarded as a serious offence because it undermines market integrity, interferes with genuine price discovery, and creates unfair advantages for certain market participants.
Definition of Wholesale Financial Market
A Wholesale Financial Market refers to a market in which large-scale financial transactions are conducted between institutional participants rather than individual retail customers.
Participants commonly include:
Case Scenario
XYZ Bank Berhad operates a large treasury department that actively trades foreign exchange and government securities in Malaysia’s wholesale financial market.
As the end of a trading day approaches, a senior foreign exchange dealer notices that the bank’s profitability targets for the quarter may not be achieved. To improve the bank’s reported trading performance, the dealer places a series of large foreign exchange orders designed solely to influence the closing market rate.
The dealer has no genuine intention of completing several of the transactions. Some orders are cancelled immediately after other market participants react to them. In addition, the dealer collaborates with traders from another financial institution to submit coordinated quotations that artificially influence a benchmark fixing rate used in the market.
The dealer also enters numerous buy and sell orders through an electronic trading platform without any intention to execute the transactions. The objective is to create the appearance of strong market demand and liquidity so that other participants will trade at prices favourable to the dealer.
Following a routine market surveillance exercise, Bank Negara Malaysia identifies unusual trading patterns and commences an investigation.
Statutory Prohibition of Market Manipulation
Section 141 Financial Services Act 2013
Section 141 of the Financial Services Act 2013 prohibits a person from:
1. Creating Artificial Rates
A person must not participate in or carry out any transaction that has, or is likely to have, the effect of creating an off-market rate which results in an artificial rate for dealing in financial instruments within the:
2. Creating a False or Misleading Appearance
A person must not create or cause anything that creates a false or misleading appearance of active dealing in financial instruments within the:
Examples of Market Manipulation
Without limiting the broad scope of sections 141 FSA 2013 and 153 IFSA 2013, the following conduct constitutes market manipulation.
(A) Influencing the Closing Price
This occurs where a person trades with the intention of benefiting from influencing the closing price of a financial instrument.
The objective is not genuine trading but artificially affecting the market’s closing valuation for personal or institutional gain.
Example
A dealer executes a large volume of transactions shortly before market close solely to push prices higher and improve the valuation of securities held by the bank.
(B) Interfering with Normal Supply and Demand
This occurs when a person interferes with ordinary market forces so that prices no longer reflect genuine supply and demand.
Examples include:
Wash Trades
Transactions where the same person is effectively both the buyer and seller, creating the illusion of market activity without any real change in ownership.
Stop-Loss Hunting
Deliberately moving market prices to trigger other traders’ stop-loss orders for the manipulator’s advantage.
Such conduct distorts market conditions and misleads participants.
(C) Trading Without Genuine Commercial Intention
Market participants must have a legitimate trading or commercial purpose when entering transactions.
A transaction entered solely to manipulate prices, influence perceptions, or mislead other market participants may constitute market manipulation.
Example
Entering large transactions solely to affect market prices without any real economic purpose.
(D) Manipulating Benchmark Fixing Rates
Benchmark rates are widely used in financial markets to price transactions and determine contractual obligations.
Manipulation occurs where traders:
Example
Several traders cooperate to submit artificial foreign exchange quotations that influence a benchmark reference rate.
(E) Spoofing
Spoofing occurs when a trader places bids or offers with the intention of cancelling them before execution.
The objective is to mislead other market participants regarding genuine market demand or supply.
Example
A trader places a large purchase order to create the impression of strong demand but cancels the order immediately before execution.
(F) Price Flashing
Price flashing occurs when a person enters prices into an electronic trading or broking platform without any genuine intention to trade.
The purpose is to create a false impression regarding:
A trader repeatedly displays attractive buying prices to lure participants into the market before withdrawing those quotations.
Application to the Case Scenario
The conduct of the dealer at XYZ Bank Berhad falls squarely within the statutory prohibitions against market manipulation.
First, the dealer attempted to influence the closing foreign exchange rate through large transactions entered near the end of the trading session. This constitutes trading with the intention of benefiting from influencing the closing price of a financial instrument.
Second, the dealer entered orders without any genuine intention of executing them. Such conduct amounts to spoofing and demonstrates an absence of legitimate commercial intent.
Third, the dealer collaborated with traders from another institution to influence a benchmark fixing rate. This represents benchmark manipulation through collusion.
Fourth, the dealer entered numerous orders on an electronic trading platform merely to create the appearance of market demand and liquidity. This amounts to price flashing and creates a false or misleading appearance of active dealing.
The dealer therefore engaged in several forms of market manipulation prohibited under section 141 FSA 2013 and section 153 IFSA 2013.
Solution to the Case Scenario
In this scenario, the senior dealer deliberately attempted to distort the operation of the wholesale financial market.
The dealer:
Accordingly, Bank Negara Malaysia may commence:
Practical Application
The prohibition against market manipulation is particularly relevant to:
Critical Analysis
The prohibition on market manipulation is fundamental to ensuring that financial markets operate efficiently and fairly. Financial markets rely upon genuine supply and demand to determine prices and allocate capital effectively.
Manipulative practices such as spoofing, wash trades, benchmark manipulation, and price flashing undermine the reliability of market prices and distort investment decisions. If left unchecked, such conduct can erode confidence among market participants and weaken the stability of the financial system.
The broad wording of sections 141 FSA 2013 and 153 IFSA 2013 demonstrates the legislature’s intention to capture both traditional and technologically sophisticated forms of market abuse. This is particularly important in modern markets where electronic trading systems allow manipulation to occur rapidly and across multiple jurisdictions.
Nevertheless, enforcement remains challenging. Regulators must distinguish between legitimate trading strategies and manipulative conduct, often requiring sophisticated surveillance technology and detailed market analysis. Consequently, effective enforcement depends not only on legislation but also on robust monitoring systems, strong corporate governance, and a culture of compliance within financial institutions.
The provisions therefore serve both a punitive and preventative function by deterring misconduct while promoting market integrity and investor confidence.
Conclusion
Market manipulation is a serious offence under section 141 of the Financial Services Act 2013 and section 153 of the Islamic Financial Services Act 2013.
These provisions prohibit conduct that:
Introduction
The integrity of Malaysia’s financial system depends heavily on fair and transparent market practices. Market participants must not engage in activities that distort prices, create artificial market conditions, or mislead other participants regarding the true state of the market.
To preserve confidence in the financial system, section 141 of the Financial Services Act 2013 (FSA 2013) and section 153 of the Islamic Financial Services Act 2013 (IFSA 2013) prohibit various forms of market manipulation in the money market and foreign exchange market. These provisions are further reinforced by the Code of Conduct for Malaysia Wholesale Financial Markets issued by Bank Negara Malaysia (BNM).
Market manipulation is regarded as a serious offence because it undermines market integrity, interferes with genuine price discovery, and creates unfair advantages for certain market participants.
Definition of Wholesale Financial Market
A Wholesale Financial Market refers to a market in which large-scale financial transactions are conducted between institutional participants rather than individual retail customers.
Participants commonly include:
- Banks;
- Investment banks;
- Islamic banks;
- Development financial institutions;
- Insurance companies;
- Takaful operators;
- Pension funds;
- Asset management companies;
- Government agencies;
- Corporations; and
- Other institutional investors.
- Foreign exchange (FX);
- Money market instruments;
- Government securities;
- Bonds;
- Sukuk;
- Derivatives;
- Interest rate products; and
- Other financial instruments.
Case Scenario
XYZ Bank Berhad operates a large treasury department that actively trades foreign exchange and government securities in Malaysia’s wholesale financial market.
As the end of a trading day approaches, a senior foreign exchange dealer notices that the bank’s profitability targets for the quarter may not be achieved. To improve the bank’s reported trading performance, the dealer places a series of large foreign exchange orders designed solely to influence the closing market rate.
The dealer has no genuine intention of completing several of the transactions. Some orders are cancelled immediately after other market participants react to them. In addition, the dealer collaborates with traders from another financial institution to submit coordinated quotations that artificially influence a benchmark fixing rate used in the market.
The dealer also enters numerous buy and sell orders through an electronic trading platform without any intention to execute the transactions. The objective is to create the appearance of strong market demand and liquidity so that other participants will trade at prices favourable to the dealer.
Following a routine market surveillance exercise, Bank Negara Malaysia identifies unusual trading patterns and commences an investigation.
Statutory Prohibition of Market Manipulation
Section 141 Financial Services Act 2013
Section 141 of the Financial Services Act 2013 prohibits a person from:
1. Creating Artificial Rates
A person must not participate in or carry out any transaction that has, or is likely to have, the effect of creating an off-market rate which results in an artificial rate for dealing in financial instruments within the:
- Money market; or
- Foreign exchange market.
2. Creating a False or Misleading Appearance
A person must not create or cause anything that creates a false or misleading appearance of active dealing in financial instruments within the:
- Money market; or
- Foreign exchange market.
Examples of Market Manipulation
Without limiting the broad scope of sections 141 FSA 2013 and 153 IFSA 2013, the following conduct constitutes market manipulation.
(A) Influencing the Closing Price
This occurs where a person trades with the intention of benefiting from influencing the closing price of a financial instrument.
The objective is not genuine trading but artificially affecting the market’s closing valuation for personal or institutional gain.
Example
A dealer executes a large volume of transactions shortly before market close solely to push prices higher and improve the valuation of securities held by the bank.
(B) Interfering with Normal Supply and Demand
This occurs when a person interferes with ordinary market forces so that prices no longer reflect genuine supply and demand.
Examples include:
Wash Trades
Transactions where the same person is effectively both the buyer and seller, creating the illusion of market activity without any real change in ownership.
Stop-Loss Hunting
Deliberately moving market prices to trigger other traders’ stop-loss orders for the manipulator’s advantage.
Such conduct distorts market conditions and misleads participants.
(C) Trading Without Genuine Commercial Intention
Market participants must have a legitimate trading or commercial purpose when entering transactions.
A transaction entered solely to manipulate prices, influence perceptions, or mislead other market participants may constitute market manipulation.
Example
Entering large transactions solely to affect market prices without any real economic purpose.
(D) Manipulating Benchmark Fixing Rates
Benchmark rates are widely used in financial markets to price transactions and determine contractual obligations.
Manipulation occurs where traders:
- Collude with others;
- Coordinate quotations; or
- Submit false information
Example
Several traders cooperate to submit artificial foreign exchange quotations that influence a benchmark reference rate.
(E) Spoofing
Spoofing occurs when a trader places bids or offers with the intention of cancelling them before execution.
The objective is to mislead other market participants regarding genuine market demand or supply.
Example
A trader places a large purchase order to create the impression of strong demand but cancels the order immediately before execution.
(F) Price Flashing
Price flashing occurs when a person enters prices into an electronic trading or broking platform without any genuine intention to trade.
The purpose is to create a false impression regarding:
- Market prices;
- Liquidity;
- Supply; or
- Demand.
A trader repeatedly displays attractive buying prices to lure participants into the market before withdrawing those quotations.
Application to the Case Scenario
The conduct of the dealer at XYZ Bank Berhad falls squarely within the statutory prohibitions against market manipulation.
First, the dealer attempted to influence the closing foreign exchange rate through large transactions entered near the end of the trading session. This constitutes trading with the intention of benefiting from influencing the closing price of a financial instrument.
Second, the dealer entered orders without any genuine intention of executing them. Such conduct amounts to spoofing and demonstrates an absence of legitimate commercial intent.
Third, the dealer collaborated with traders from another institution to influence a benchmark fixing rate. This represents benchmark manipulation through collusion.
Fourth, the dealer entered numerous orders on an electronic trading platform merely to create the appearance of market demand and liquidity. This amounts to price flashing and creates a false or misleading appearance of active dealing.
The dealer therefore engaged in several forms of market manipulation prohibited under section 141 FSA 2013 and section 153 IFSA 2013.
Solution to the Case Scenario
In this scenario, the senior dealer deliberately attempted to distort the operation of the wholesale financial market.
The dealer:
- Influenced the closing market rate for personal or institutional advantage;
- Entered transactions without genuine trading intentions;
- Manipulated benchmark fixing rates through collusion with other traders;
- Used spoofing techniques by placing and cancelling orders; and
- Engaged in price flashing to create a false appearance of market liquidity.
Accordingly, Bank Negara Malaysia may commence:
- Criminal proceedings;
- Civil enforcement actions;
- Administrative penalties;
- Regulatory sanctions; and
- Disciplinary actions against the dealer.
Practical Application
The prohibition against market manipulation is particularly relevant to:
- Treasury departments;
- Foreign exchange dealers;
- Money market traders;
- Bond traders;
- Sukuk traders;
- Investment bankers;
- Electronic trading platform operators; and
- Financial market intermediaries.
- Establish strong compliance controls;
- Monitor trading activities in real time;
- Implement surveillance systems;
- Maintain clear audit trails;
- Conduct regular compliance training;
- Enforce ethical dealing standards;
- Monitor benchmark submissions; and
- Investigate suspicious trading behaviour promptly.
Critical Analysis
The prohibition on market manipulation is fundamental to ensuring that financial markets operate efficiently and fairly. Financial markets rely upon genuine supply and demand to determine prices and allocate capital effectively.
Manipulative practices such as spoofing, wash trades, benchmark manipulation, and price flashing undermine the reliability of market prices and distort investment decisions. If left unchecked, such conduct can erode confidence among market participants and weaken the stability of the financial system.
The broad wording of sections 141 FSA 2013 and 153 IFSA 2013 demonstrates the legislature’s intention to capture both traditional and technologically sophisticated forms of market abuse. This is particularly important in modern markets where electronic trading systems allow manipulation to occur rapidly and across multiple jurisdictions.
Nevertheless, enforcement remains challenging. Regulators must distinguish between legitimate trading strategies and manipulative conduct, often requiring sophisticated surveillance technology and detailed market analysis. Consequently, effective enforcement depends not only on legislation but also on robust monitoring systems, strong corporate governance, and a culture of compliance within financial institutions.
The provisions therefore serve both a punitive and preventative function by deterring misconduct while promoting market integrity and investor confidence.
Conclusion
Market manipulation is a serious offence under section 141 of the Financial Services Act 2013 and section 153 of the Islamic Financial Services Act 2013.
These provisions prohibit conduct that:
- Creates artificial market rates;
- Produces false or misleading appearances of market activity;
- Interferes with genuine supply and demand;
- Manipulates benchmark fixing rates;
- Involves spoofing;
- Involves wash trades;
- Involves stop-loss hunting; and
- Involves price flashing on electronic trading platforms.
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