The Financial Services Authority has fined Swift Trade £8 million for what it described to be the most 'serious' case of market abuse of its kind.
The penalty represents the largest it has ever issued against a firm for market manipulation.
The Upper Tribunal gave the watchdog the green light to impose the fine on the non-FSA authorised Canadian firm, which has global operations.
Between January 2007 and 2008, Swift Trade was said to be part of a ‘systematic and deliberate’ form of manipulate trading, called layering.
The layering caused small price movements in a wide range of individual shares on the London Stock Exchange, from which Swift Trade captured substantial profits.
The trading involved tens of thousands of orders by individual traders which led to a false view of supply and demand, as well as an artificial share price.
When Swift Trade became aware the exchange had raised concerns in March 2007, the firm moved to evade restrictions on its trading by enhancing its trading pattern, so as to not be detected.
For example, the firm changed its direct market access provider, which allows investors to place buy and sell orders directly on the order book.
Swift Trade argued its trading was not market abuse, because its orders were in derivatives not shares, which were hedged in shares on exchange.
However, the Tribunal dismissed the argument and said the derivative orders were placed in the knowledge the direct market access providers would immediately match them with hedging orders in shares.
The Tribunal concluded the evidence pointed ‘very much’ to the conclusion that Swift Trade’s officers and managers knew that its conduct was not legitimate and that they actively encouraged it.
Tracey McDermott, FSA director of enforcement and financial crime said: ‘This was a particularly cynical case where a business model was based on market abuse.
'The approach taken by Swift Trade was novel and complex, designed to allow them to benefit at the expense of other market users, and to make detection more difficult.’
She added: ‘We urge other market participants to take note of this judgment which makes it clear that layering is abusive. We expect brokers and DMA providers to ensure that their clients implement appropriate controls to monitor their clients’ trading activity closely to ensure that it is not abusive, and to report suspicious transactions.’