SFC fines Macquarie over rebate scheme
The Securities and Futures Commission has reprimanded and fined Macquarie Equities (Asia) HK$4 million for failing to properly control its warrant commission rebate programme, which enabled two individual investors to manipulate the market for a year from January 2004.
The SFC said Macquarie's failure to control the rebate system had allowed Patrick Fu Kor-kuen and Francis Lee Shu-yuen to manipulate derivative warrants issued by Macquarie Bank.
The SFC prosecuted Fu and Lee in November last year and the case is still pending.
Fu and Lee were clients of two separate brokers participating in Macquarie's commission rebate programme, under which Macquarie gave a rebate to investors through their brokers, paying back part or all of their brokerage fees to encourage warrant trading.
Since the rebate programme generated huge commission rebates, the two brokerages gave clients discounts on large volume trades. As a result, Fu and Lee were able to generate risk-free profits from the difference between commission rebates and the discounted brokerage costs.
They traded between themselves at almost the same prices frequently to earn a profit and created a false impression of heavy trading in warrants. In one case, Fu and Lee conducted about 400 trades between themselves in 60 minutes, or one transaction in every 10 seconds.
Their trading represented 90 per cent of that warrant's trade on the day.
The SFC said their repeated trading in the warrants artificially ballooned volume by more than HK$450 million.
'The volume and nature of the trading should have alerted Macquarie to make additional inquiries about the operation of the commission rebate scheme, and to check whether it was distorting the market for these Macquarie Bank warrants,' the SFC said.
Macquarie scrapped the commission rebate scheme in December 2005, and the commission banned the practice in March 2006.