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Heard the rumour about the US investment bank about to be shut down? Or the company that is going to issue a profit warning? In current febrile market conditions any of these rumours might be taken seriously by traders and brokers hungry for tittle-tattle to share with their clients. But the Financial Services Authority is about to clamp down on malicious rumours.
The City regulator warned yesterday that spreading false or misleading rumours about companies can be a "very damaging form of market abuse".
Following a six-month analysis of how City firms handle rumours after the assault on the share price of HBOS in March, the FSA has issued guidance about how they should be handled:
• Formal guidelines on how to handle gossip including a "clear prohibition on originating rumours" and a warning that extra caution is needed;
• Training on how to handle rumours with "market abuse" courses;
• Monitoring phone calls, emails and messages after suspicious price movements and trades.
Alexander Justham, of the FSA's markets division, said: "Spreading false or misleading rumours about companies, particularly in volatile or fragile market conditions, can be a very damaging form of market abuse.
"While we pursue individual cases of rumour-mongering, it is of equal concern to us that market practitioners ... avoid giving credibility to false stories."
The FSA wrote to more than 50 firms to ask them about their policies in the wake of the mayhem that was created in March when unsubstantiated rumours were spread about HBOS leading to a fall in its shares. But the FSA failed to prove that anyone had deliberately spread rumours to manipulate the share price.
In a newsletter yesterday the FSA provided a hypothetical scenario to illustrate its concerns: a trader spreads a piece of "hot news" that an investment bank is being forced to stop trading by a regulator to 12 of his closest contacts without making clear that it is an unsubstantiated rumour. One of them then spreads the message to 150 of his contacts. As a result, the news reaches an employee at the firm that was the subject of the rumour. The FSA is informed and the rumour is retracted.
The FSA said this kind of "ill-thought through" gossiping could have "massive market-wide repercussions". Even though the trader had not attempted to profit from the rumour, the FSA said it would be unhappy with this kind of behaviour.
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