M.O. Trofimchuk
MECHANISMS OF IMPROVEMENT OF COMPETITIVE ACTIVITY
ON THE SECURITIES MARKET IN UKRAINE
Summary. In the article, basing on the analysis of international practice, proposed to improve
the national legal framework in terms of combating with manipulative actions on the securities
market. Also practical recommendations for listing requirements to the shares in regard of admission
to exchange trading are improved. Proposals are aimed at enhancing investor protection, competition
increasing and enforcement of competitive relationships between the parties of commercial
transactions.
Key words: securities market, market manipulation, listing, stock exchanges.
Problem statement. Stock exchanges as centers of organized securities
trading, always perform a regulatory function in relation to the participants of
trading operations. Stock exchange, as a market infrastructure participant, is
interested in following of the competitive business relationships by all participants
and their responsibility for the market transactions. Thus, as investor confidence in
the stock market is extremely important for all market participants, so stock
exchange as the embodiment of the organized securities market is an institution
that should monitor competition compliance, fair pricing and transparency of trade
transactions.
Analysis of the recent research and publications. The functioning of
securities markets and stock exchanges is researched by M. Aljeksjejev, T.
Bjerdnikova, R. Merton, Ya. Mirkin, G. Soros, F.Miskin, M. Kozoriz, V.
Kornjejeva, O. Mendrul, O. Mozgovyj, V. Oskol's'kyj. The dynamic
development of economic relations requires improvement of the regulatory
mechanisms of competitive principles in all areas, including the securities market.
Inconsistency domestic regulatory provisions and conditions to the modern
world standards, is complicating the effectiveness of competition regulation on the
stock market in Ukraine.
The purpose of this article is to develop practical recommendations for
improving of the effectiveness of regulation of competitive relations on the
Ukrainian securities market.
Researcher and active participant of the stock market G. Soros in his book
"The Alchemy of Finance" emphasizes that in comparison with other markets, the
stock market most relevant to criteria of perfect competition: centralized trades
providing, same products, low transaction costs, instant communication, a large
number of participants, so no one of them could affect market prices, and special
rules for internal operations, along with measures that ensure for all participants
relevant access to the information. If there is a place where the theory of perfect
competition should become a reality, it is the stock market [1, с.55]. This
statement deserves on attention, however, describing the stock market as a market
of the perfect competition in the light of equitable access to the information, does
not considered a factor of insider trading, which greatly affects on the competitive
market environment.
In detail, the process of the information impact on the value of shares that
sells on the stock market is highlighted by F. Mishkin and S. Eakins. In their study
is showed, that investors who have access to various information about the
company - the issuer of the securities, in order to compensate the risks, which they
accept according to the available information, put a different rate of return, which
ultimately affects on the value of the share. [2 , s.284-285]. Thus, the possession of
true and accurate information allows with a higher level of probability to evaluate
risks and price of the financial instruments on the stock market.
Therefore, the presence of true, undistorted information equal access to it for
all participants of the trading process is a necessary condition for the existence of
effective competitive relations between the players of the stock market. This
ensures fair pricing, and so this makes necessity to ensure effective control of both
the state and SRO. Particular attention should be given to mechanisms of detection,
combating and preventing the manipulations.
Manipulative actions on the stock market violate the terms of fair
competitive relations, especially fair pricing and equality of participants in trading
activity, which hinders to the implementation of efficient flow of investment
resources in the economy, due to the reluctance of investors to carry out
investment infusion in terms of price volatility and the possibility of other
participants to have some impact on the value of market instruments.
Ya. Mirkin during research Russian stock market research identified the
most common features of manipulative actions on the Russian market, which can
be grouped in manipulation with contracts and manipulation with information, and
gave them a detailed description. Special attention of the scientists is paid to the
necessity of special plan of actions to financial regulator in an emergency situation
(such as manipulation). Its must be the definition of an emergency, including the
connection with large-scale manipulation on the market. There should be a system
of operational monitoring of the market that provides constant flow current market
information to the regulator, its evaluation and immediate response to signals of
danger of unfair. In addition, the author notes that the legislation should consider
all existing at the present stage of development of financial relations, types of
manipulation [3].
In terms of Ukrainian securities market, in consideration of the positive
dynamics of organized stock market, in the total sales of all securities transactions,
it is vital to ensure a fair process of pricing of securities that are selling on the
stock exchanges. Key areas that need to provide are resistance and prevention of
the manipulation on the organized securities market.
To implement this it is important:
 to improve the regulatory and legislation framework
 to expand the range of criteria that make it possible to classify certain
actions, such as price fluctuations, as manipulation.
Thus, the existing list requires the addition of a new provisions and
significant refinements, including:
1. To the list of manipulative actions in the Law of Ukraine "About State
Regulation of Securities Market in Ukraine" necessary to include the following:
- purchase by a member at its own cost securities with folowing
recommendation to purchase such securities to other market participants, which
aims to change the price of the purchased securities.
- purchase by the broker on its behalf and for its own account at prices that
differ significantly from the market prices, that belong to one investor for which
the broker was ordered to sell securities to another investor
2. To add to the article 10-1 paragraph 4, the words "at the opening", "open",
"and prices" and to formulate as follows: the purchase or sale of financial
instruments at the opening and before closing of trading session on the stock
exchange in order to mislead market participants on the opening price, and the
prices that have been at the end of the trading session.
In addition to the above mentioned recommendations, it is necessary to
increase liability for manipulation on the stock market, which in Ukraine in
comparison with other countries is extremely low (Table 1).
Table 1
International practice of penalties for manipulative actions on the stock
market
Country
Russia
USA
United
Kingdom
EU
countries
Imprisonment
Penalties
Administrative penalty:
- individuals - 3-5 thousand rubles
- officials 30-50 thousand rubles
- firms: in the amount of surplus income
Up to 7 years
(or in damage amount) received but not
less yhen 700 thousand rubles
Criminal penalty:
- 500 thousand rubles;
- 1 million rubles
The maximum penalty for an individual of
140 000 USD in some cases 1000 000
Up to 10 years USD. Or three times amount of received
benefits. For firms - usually applied case
law
At least 100 000 pounds and twice size of
Up to 7 years
the recived benefit
2-4 years
Switzerland Up to 3 years
Compensation of caused
losses
Not required by law
Returning profits /
damage compensation
Returning profits /
damage compensation
The fine usually depends on the scale of
manipulation and awarding jail term
Returning profits /
damage compensation
The court sets up
Returning profits /
damage compensation
Extension table 1
Ukraine
Missing
- Administrative penalty:
- officials - 1700-8500 hryvnias same
actions – 8500-11900 hryvnias
- firms
- до 150% recived profits or 170000 –
850000 hryvnias
Criminal penalty for officials stock
market participants:
- 51000-85000 hryvnias
- same actions, or actions done in
collusion -85000-170000 hryvnias
Not required by law
Note: compiled based on [14]
Therefore it is necessary to amend the Code of Ukraine on Administrative
Offences, the Law of Ukraine "On State Regulation of Securities Market in
Ukraine" and the Criminal Code of Ukraine, in particular:
1 Administrative responsibility:
administrative responsibility: for officials to establish an administrative fine
in the amount from 2 to 10 thousand of untaxed minimal incomes (or 34000 170000 hryvnias) And deprivation the right to occupy certain positions or engages
certain activities for a term of one to three years depending on the consequences of
committed actions, and to oblige to pay damages as an result of manipulative
actions, to other market participants;
the same actions committed by a group or persons or person that has been
subjected to administrative penalty for the offense - punishable by a fine from two
thousand to 10 thousand untaxed minimal incomes (or 170000-340000 hryvnias)
And deprivation of the right to occupy certain positions or engage certain activities
for a term of three to five years depending on the consequences of committed
actions, and to oblige to pay damages as an result of manipulative actions, to other
market participants.
for juridical persons - a fine from 10 thousand to 100 thousand untaxed
minimal incomes (or 170000- 1700000 USD.), depending on the amount of
damage caused by manipulative actions, or 300% of the profits derived from such
actions also to oblige to pay damages as an result of manipulative actions, to other
market participants.
2 Criminal responsibility

for deliberate actions of an official participant of the stock market, that have
signs of manipulation on the stock exchange, necessary to set up a fine from 5
thousand to 20 thousand tax-free minimum incomes, or imprisonment for up to one
year.

for the same actions committed repeatedly or by collusion of group of
persons or if they caused any grave consequences, - a fine from 10 thousand to 40
thousand untaxed minimal incomes with imprisonment for a term of one to four
years depending on the amount of damage that was caused by manipulative actions
or presence (absence) of collusion group of persons.
Such an increase in responsibility is aimed, above all, to prevent
manipulation on the securities market, providing competitive relations between
market participants and increase the overall level of confidence in the securities
market in Ukraine.
Another step that needs to be done for better regulation of competitive
relations on the securities market is a providing a balance in requirements for
listing on the stock exchanges.
On the one hand increasing regulation of normative criteria that establish
exchanges for listing there is providing an access to the securities market the most
profitable, financial reliable, large issuers. This in turn ensures security investments
for investors and canceling a necessity conduct relevant research to find the most
profitable and low risk options for investments.
However, in terms of low economic development of the whole national
economy and most companies in particular, significant part of firms are not able to
compete in financial conditions with large companies for inclusion into the listing
levels of stock exchanges.
Thus there is a restriction of competition in part of rotation the similar
financial instruments on the stock market, and limited opportunities for developing
enterprises in attracting additional funds at the stock market. That is a lack of
competition between securities which are present in the stock market, because of
the small number of issuers represented on the organized securities market, as well
as between enterprises in general, due to the fact that large corporations have more
opportunities to attract resources to finance their activity.
Modern crisis trends in the economic and the financial sector causing a shift
of views of exchanges from providing circulation of the most reliable securities in
the direction of ensuring their own profitability by expanding the number of
issuers that sell their securities on an exchange and pay fees for the entering and
maintenance securities in the stock list. This, in turn, increases market liquidity,
exacerbating competition between instruments on the market. This in turn
increases market liquidity, develop competition between market securities.
However, in this case increases the risk for investors to invest in low-quality
securities. Therefore, the criteria for listing of securities should be possible to
encourage issuers to place their securities for trading on the stock exchange, which
will increase liquidity and competition. On the other hand, requirements must to
provide reasonable level of investor protection.
Overall in the world practice of the admission of securities to listing
generated a number of criteria:
 requirements for financial indicators;
 requirements for mandatory disclosure of information;
 requirements to ensure an appropriate level of securities liquidity;
 requirements to ensure high standards of corporate governance.
Leading domestic stock exchanges focusing mainly on financial indicators and
liquidity ratios of the issuer of securities in accordance to Decision of National
Commission of Securities and Stock Exchanges “About Approval of the state of
functioning of stock exchanges" from 22.11.2012 № 1688 and almost don’t set up
additional requirements for listing (Table 2) .
Table 2
Admission criteria for listing on domestic stock exchanges
Financial
Free Float, %
Minimum number of contracts in recent months /
minimum average value of contracts ( million
hryvnias ).
Presence of Exchange rate
Others
Minimum vo;ume of net assets million hryvnias
The minimum annual turnover for the last financial
year, million hryvnias
The minimum of market capitalization, , million
hryvnias
Financial result
Liquidity
Criteria for shares
The minimum period of activity, years
Level of listing
1
100
100
2
50
-
100
50
The absence of losses on the
basis of the last 2 financial
years
15
6 months
100/10
at least once every two
weeks
3
-
3
months
10/0,25
3
months
Note: compiled based on [10; 11; 12; 13]
Thus the main areas of improvement the listing requirements for issuers of shares,
in the context of the development of a competitive environment, in our opinion,
should apply the three main aspects (Figure 1).
Ways of improvement regulation of the listing requirements for shares issuers
Increasing freeflaot level
Reducing the number of criteria to
the financial indicators of the
issuer
Set up the mandatory
requirement of
corporate governance
This will improve the protection of investors, including minority shareholders,
increase in the liquidity of securities and the stock market, develop competition and
and will ensure competitive relationship between issuers and investors
Figure 1. Key areas of improvement of the listing requirements and effect of
their use
So, significant attention of the National Commission of Securities and Stock
Market must be paid to the regulation of the level of free-float, which describes the
proportion of shares that are in free circulation in the stock market. It should be
noted that the higher the figure the better it affects on the liquidity of the securities
and the market in general.
In addition it reduces the probability of speculation with the price of the
shares. Thus prescribing in normative documents demand of a higher level of this
indicator for stocks of issuers who apply for registration in the appropriate listing
level of can be reduced the possibility of price manipulation from the majority of
share holders, who in case of a small part of shares in free circulation have much
more leverage for price manipulation.
Therefore, taking into account international practice, of the requirement
establishment for issuers of the shares in the part free-float level regulation (Table
3) is necessary to made changes in decision of National Commission of Securities
and Stock Market " About Approval of the state of functioning of stock
exchanges".
Table 3
Requirements to the free-float, at various stock exchanges
Country
UAE
China
France
Stock exchange
NASDAQ Dubai
Hong Kong Stock Exchange
Shanghai Stock Exchange
NYSE Euronexk Paris
Germany
India
German stock exchange
Bombay Stock Exchange
The Netherlands
National Stock Exchange of India
NYSE Euronexk Amskerdam
Singapore
Singapore Stock Exchange
Switzerland
United Kingdom
free-float requirements
25
25
25
25% or 5%, if their value is not less
than 5 million euros
25
25
SIX Swiss Exchange
25
25% or 5%, if their value is not less
than 5 million euros
For companies with a market
capitalization less than 300 million
Singapore dollars at least 25%. For
companies
with
market
capitalization over 300 million
Singapore dollars at least 12%
25
London Stock Exchange
25
Note: compiled based on [14].
Thus, it is advisable to increase the minimum free-float rate to 25% for the
first level of listing and set this parameter to quotation list of the second level of
listing at 5%.
Also it is necessary:
1. Reduce the number of criteria that concerning financial indicators to share
issuers. For the first level of listing we recomend to remove such the financial
indicator as net assets value . For the second level of listing:
 set the minimum size of market capitalization at the equivalent of 25
million uah
 obligation to break-even activity reduce to 1 year
 reduce the minimum size of required annual income for the last financial
year to 25 million uah
2. Include requirement for shares of the first level of listing commitment to
corporate governance
3. Include as mandatory requirement for shares of the first listing level he
availability for the issuer at least one market maker to maintain the liquidity of its
securities.
Conclusions. Implementation of the proposed recommendations will
prevent the emergence of manipulative actions on the stock market, which in turn
will increase the transparency of concluding agreements, will protect investors and
promote competition among participants of the trading operations.
The implementation of the proposed measures, concerning listing
requirements increase the liquidity of shares and the stock market in general, will
encourage small investors (especially people) to invest in securities will provide a
higher level of fair competitive relations between major and minor shareholders,
which is due to the principles of corporate governance.
Further research should be aimed at solving problems of implementation the
proposed measures and provide national competition regulation standards on the
securities market in accordance to the international, due to the chosen of European
integration vector of the domestic economy.
References
1.
Сорос Дж. Алхимия Финансов./ Дж .Сорос. пер. с англ. – М .:
ИНФРА-М, 2001. – 416с.
2.
Mishkin F. Financial Markets and Institutions 5-th edition/ F.
Mishkin, S.Eakins. – Pearson Addison-Wesley USA, 2006. –730p.
3.
Миркин Я.М.
Российский рынок ценных бумаг: влияние
фундаменгтальных факторов, приоритеты и механизмы развития: дис.
док.экон. наук 08.00.10 / Я.М.Миркин. – М., 2003. – 575с.
4.
Söderström R. Regulating Market Manipulation an Approach to
designing Regulatory Principles / R. Söderström.– Norrland: Uppsala Faculty of
Law Working Paper, 2011. – 48p.
5.
Худякова
Л.С.
Международный
опыт
борьбы
с
манипулятивными сделками на финансовых рынках / Л.С. Худякова// Деньги
и кредит. – 2011. - №7. – С. 65-70.
6.
Slaughter and May - The EU/UK Market Abuse Regime . – Overview
[Electronic
Resourc].
–
Mode
of
access:
:
https://www.slaughterandmay.com/what-we-do/publications-andseminars/publications/client-publications-and-articles/t/the-euuk-market-abuseregime---overview.aspx.
7.
Бадаева В. М. Совершенствование системы выявления и
пресечения манипулятивных сделок на российском рынке ценных бумаг с
использованием ценовых критериев: автореферат дис. канд. экон. наук спец.
08.00.10 «Финансы, денежное обращение и кредит»/ В.М. Бадаева. – Москва.
– 2011. - 26с.
8.
Кодекс
України
про
адміністративні
правопорушення
від 07.12.1984 № 8073-X. Редакція від 22.07.2014 / Верховна Рада України
[Електронний
ресурс].
–
Режим
доступу:
http://zakon1.rada.gov.ua/laws/show/80731-10.
9.
Кримінальний кодекс України від 05.04.2001 № 2341-III. Редакція
від 19.06.2014 / Верховна Рада України [Електронний ресурс]. – Режим
доступу: http://zakon3.rada.gov.ua/laws/show/2341-14.
10. Рішення Національної комісії з цінних паперів та фондового
ринку «Про затвердження Положення про функціонування фондових бірж»
№1688 від 22.11.2012 / Верховна Рада України [Електронних ресурс]. –
Режим доступу: http://zakon4.rada.gov.ua/laws/show/z1045-11.
11.
Правила фондової біржі ПФТС [Електронних ресурс]. – Режим
доступу: http://www.pfts.ua/uk/documents/?get_file=1610.
12.
Правила
торгівлі
фондової
біржі
Українська
Біржа
[Електронних ресурс]. – Режим доступу: http://fs.ux.ua/files/27/.
13. Правила торгівлі фондової біржі «Перспектива» [Електронних
ресурс].
–
Режим
доступу:
http://fbp.com.ua/docs/Norm/NewFile/Rules20140702.pdf.
14. Сравнительный анализ мировых фондовых бирж [Електронних
ресурс]. – Режим доступу: www.ey.com/.../Comparing-global-stock-exchangesrus-2012.pdf.