The European Union is completely overhauling its laws against market abuse in relation to the trading of financial instruments this year. With effect from 3rd July, the previously applicable Market Abuse Directive (MAD) will be replaced by the new Market Abuse Regulation (MAR).

This is a long-delayed reaction to the financial crisis of 2007/8 and is to perform two significant tasks. It creates rules that are to apply directly to all EU countries; and it will make sanctioning regulations much more severe. This is partly aimed at preventing regulatory arbitrage between EU countries, although in view of the massive preponderance of the City of London in the European trading arena, this is a slightly academic point. The extreme increase in sanctions come in the form of minimum penalties to be prescribed on an EU-wide basis and various parties are to be obliged to disclose all transgressions publicly (i.e. to 'name and shame' recalcitrants). The Criminal Sanctions for Market Abuse Directive (known as MAD II or CSMAD), will have to be transposed into national laws by 3rd July.

The new market abuse legislation strengthens and extends the provisions of existing EU law, which it will extend to apply to all financial instruments that have been approved for trading on multilateral trading facilities (MTFs) or on other organised trading facilities (OTFs), as well as all non-exchange-traded derivatives, plus derivatives that may affect the underlying markets.

National regulators are making their regulations more onerous as well. The Austrian Financial Markets authority, for one, plans to oblige issuers on the 'third market' at the Vienna Stock Exchange to make ad hoc publicity disclosures and to notify it about directors' dealings. 'Ad hoc publicity' (the forced publication of such information without delay) is its way of stopping people from abusing insider information. The directors' dealings rule obliges managers and persons closely linked to them to disclose their proprietary trading activities in financial instruments issued by the companies.

In future, the reporting requirement for directors' dealings will not only cover proprietary trading activities in shares, but will also extend to associated derivatives or other associated financial instruments and debt instruments. For example, gifts or inheritances of financial instruments (e.g. shares, bonds, etc.) of an issuer, which a manager receives from this issuer, will also become notifiable.

New rules will also come into effect for the handling of insider information as part of 'market sounding' in conjunction with the placement of securities, for example when an issuer plans to issue a bond. To be able to estimate the actual volume and pricing of an issuance, the issuer will have to supply information about the planned issue to potential investors in the run-up to the actual announcement of the issue. He/it must then pass it on with the aim of determining the volume and price at which potential investors are prepared to subscribe to a bond.

In future, certain manipulative techniques for market abuse for algorithmic trading and high-frequency trading will also be explicitly prohibited. For example, it will be forbidden to enter orders or execute transactions that are “suited to starting a trend” and to motivate other market participants to accelerate this trend, whereby the trader creates an opportunity to unwind or open a position at an advantageous price (this is called 'momentum ignition'). The execution of transactions in order to uncover orders by other market participants, with the subsequent entry of an order to trade, thereby creating an advantage for oneself, a practice known as 'phishing,' will also be prohibited.