Triggers and Targets: The Anatomy of Market Manipulation

Abstract

The CFTC adopted new market manipulation rules on July 7, 2011. In addition to retaining the Commission's existing anti-manipulation authority under the CEA's "artificial price" standard, these rules give the Commission the ability to bring enforcement actions under a "fraud-based" standard structured on the SEC's Rule 10b-5, much like the statutes now in place at the FERC and FTC. Unfortunately, uniformity across statutes has yet to provide market participants with much needed direction as to the specific types of behavior that are prohibited. This is especially concerning for firms in the energy sector, who face dual regulation by the CFTC and the FERC or FTC, with possible SEC intervention to the extent that securities are involved in purported manipulations. For global energy providers, the potential complexities only grow given that the European Union is considering its own anti-manipulation rules under the REMIT Proposal. This short paper addresses the need for uniformity by articulating a framework for the analysis of market manipulation that applies across cases, agencies, statutes and (now potentially) nations. This framework simplifies the economic decision making involved in executing a manipulation to a cost/benefit analysis that is both economically and legally straightforward and cogent. Adoption of this framework could reduce the uncertainty associated with anti-manipulation laws and regulations, thus minimizing compliance costs for market participants and maximizing the efficient use and coordination of scarce regulatory resources.