Background

In March 2006, we published a method of measuring the cleanliness of UK financial markets (OP23). The paper sought to establish a robust 'outcome-focused' methodology to assess the deterrent effect of FSA regulation and the impact of the Financial Services & Markets Act (FSMA), which came into force in 2001. The methodology measures market cleanliness by looking at the extent to which share prices move ahead of the regulatory announcements that companies are required to make to the market.

Objective

In principle the methodology enables the FSA to measure, over time, its success in tackling market abuse, one of its key aims. This is part of the FSA's drive to establish key indicators that will help it understand better how successful it is at achieving the intended benefits of regulation. We intend to repeat the analysis for later periods, for example to identify whether our enforcement activities have increased the effectiveness of the regime.

Methodology

In OP23, we analysed two kinds of market announcements: those relating to take-over bids in 2000 and 2004 and announcements about the trading performance of FTSE 350 listed companies between 1998 and 2003. The analysis indicated that there was no change in market cleanliness in relation to announcements by FTSE 350 listed companies. The analysis of announcements relating to takeovers in 2004 relative to 2000, showed that there was a small but statistically significant increase in informed price movements suggesting a deterioration in market cleanliness.