New Zealand: Hong Kong market manipulation defence – don't try this at home

Brief Counsel

Did you hear the one about the two Hong Kong day traders who engaged in a blizzard of "matched trades" to take advantage of Macquarie Bank to the tune of around $1 million?

Hong Kong's Court of Final Appeal quashed their convictions because their intention had not been to mislead the market but to "farm" Macquarie's commission rebate scheme.

They wouldn't get away with it here, however, because the defence is not available in New Zealand law.

A sweet arrangement (except for Macquarie)

The scheme relied on the fact that the traders received discounted brokerage from the volume of their trading, and that these discounts brought their transaction costs on each trade lower than commission rebates paid by Macquarie on its derivative warrants.

The margins were small: a brokerage rate of 0.04% and Macquarie rebates which were typically between 0.1% and 0.25% of the consideration for a trade. But, by making repeated matched trades back and forth between themselves on 19 or 20 days (the judgment is inconsistent on this point) between January 2004 and January 2005, they were able to pocket around $1 million.

On each of the days they traded, their trades dominated the traffic in that warrant – accounting for 76% of all trades on one occasion.

They usually traded the warrants between themselves at the same price and exited them often at the same price they bought them, and generally back to Macquarie. Sometimes they sold them to third parties, and sometimes they sold them at a small profit or a small loss (not counting their rebate income). One day, for example, they started with warrants worth $208,000 which they sold at the end of the day to a third party at a modest $6,000 loss, but this was off-set by commission rebates of $87,572 to yield a profit of $81,372.

The men did not escape scot free. The District Court found that the matched trades breached Hong Kong's market manipulation laws and sentenced one to two years and nine months in jail and the other to three years. The Court of Appeal later reduced both sentences to 15 months, and at the time of the appeal hearing, they had each served almost all of this time. But the Court of Final Appeal was unanimous that the appeal should be allowed.

The Hong Kong defence

Although the Hong Kong statute deals specifically with wash sales and matched orders of the sort engaged in by the two traders, it provides a defence if the conduct was not entered into for the purpose of manipulating the market.

Or, in the words of the Court of Final Appeal: "It is the state of mind (intention or recklessness as to the creation of a certain appearance) with which anything is done that gives rise to the contravention".

And, although their conduct "created a false appearance of active trading in securities and the appellants were at least reckless as to that", it was clear from the evidence "that they acted with a commercial purpose (rebate or commission farming) that at the time was not otherwise unlawful". (Commission rebate schemes were outlawed in Hong Kong, but not until 2006.)

Accordingly, their convictions should be quashed and there should be no order for a new trial.

But their fate would have been entirely different under New Zealand law.

Don't try this at home

New Zealand's law (refer box below) is effects-based. If the case happened here, the only test would be whether their actions had the effect of creating a false or misleading appearance, and whether they knew or ought to have known that this would be, or would be likely to be, the effect. No proof (or even analysis) of intention is required.

Our legislation also specifically deals with matched orders (deeming them to be manipulative), but only where you have traded with yourself or your "associate". The Act's definition of "persons associated with each other" is limited to relatives and related companies, which makes our deeming provision narrower than Hong Kong's. So the two day traders would have fallen outside this presumption, but would nonetheless have been caught by the underlying offence anyway.

In New Zealand, you are not so deemed (and have a defence to the underlying offence) if you prove that the trading was for a "legitimate" reason. This test hasn't been judicially considered yet and isn't defined. But given that the intention of the Securities Markets Act is to provide transparency in the market, making the market appear more liquid than it is in order to profit from a commission rebate is unlikely to be a "legitimate reason".

"I was simply trying to take advantage of Macquarie Bank" was an acceptable defence in Hong Kong, but it wouldn't be in New Zealand.

New Zealand market manipulation law

The New Zealand equivalent law is the Securities Markets Act 1988 (SMA), sections 11B to 11D. In New Zealand the effect of the conduct, not the intention of the participants, is the relevant focus for liability provisions. The SMA contains civil and criminal sanctions, which commenced February 2008. To date, there have not been any court proceedings, or publicised regulatory intervention, against any SMA market participant for breach of the regime.

Prior to the 2008 amendments, New Zealand did not have any specific legislative restriction on stock market manipulation, although some provisions of the Crimes Act could apply to deliberate manipulative conduct.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions