Market manipulation
Christian Giswold and Erik Korsvold
Definition of Market Manipulation
‘market manipulation’ means:
(a) entering into any transaction or issuing any order to trade in wholesale
energy products which:
(i) gives, or is likely to give, false or misleading signals as to the supply of,
demand for, or price of wholesale energy products;
(ii) secures or attempts to secure, by a person, or persons acting in
collaboration, the price of one or several wholesale energy products at an
artificial level, unless the person who entered into the transaction or issued
the order to trade establishes that his reasons for doing so are legitimate and
that that transaction or order to trade conforms to accepted market practices
on the wholesale energy market concerned; or
(iii) employs or attempts to employ a fictitious device or any other form of
deception or contrivance which gives, or is likely to give, false or misleading
signals regarding the supply of, demand for, or price of wholesale energy
products;
General
• Effect-based regulation
– No actual effect is required; no trades need to be made
– Sufficient that an effect is ”likely”
• The effect is measured on the market
– The unsound (mis)perception of individual participants is irrelevant
• The intent of the manipulator is not relevant (except for attempt)
– Not visible to the market
– Very difficult to prove and/or verify
• It is not required that the market participant in question has deliberately
acted in order to give misleading signals as to the supply of, demand for or
price of a listed product. As long as the market participant should have
been aware that his actions were of such nature, his actions constitute a
breach of the prohibition against market manipulation.
Gives, or is likely to give
• Gives – must be evaluated ex post (actual result of the action
is relevant)
• Is likely to give – must be evaluated based on the information
that was available prior to the signal being sent
• Based on the above, information can give false or misleading
signals without being likely to do so, and it can be likely to give
false or misleading signals without actually doing so.
• In comparison, the defintion of inside information only refers
to «is likely to give», and not «gives»
False or misleading signal
• Sufficient that the information is either false or misleading,
but it has to be a signal
• What if the information is false, but it is so insignificant that
no market participant will use the information in trading?
• Possible interpretations:
– Signal: information of such a nature that a rational participant would
be likely to use the information in his or her decision of whether or not
to enter into one or more transactions, e.g. best bid/ask orders, new
order price levels, transactions, etc.
– False or misleading: give other market participants an inaccurate or
untruthful picture as to the supply of, demand for or price, e.g. placing
of a bid at the same time as the real market interest in fact is to sell
Secure
• Distinction between (i) and (ii): whereas alternative (i) only requires a
potential effect caused by “manipulative signals”, alternative (ii) requires
that an actual effect of securing [..] at an artificial level is achieved.
• It is not sufficient that the action contributes to or results in an
artificial price level. It must «secure» the artificial price level.
• Must the price be secured at a specific price level, or is it sufficient
that it is secured that the price level is artificial?
• Will a dominant position be required in order to secure a an atificial
price level?
– No, even a single order may secure the price and low liquidity
may also make it possible without a dominant position
Artificial price level
• The Market Abuse Directive is referring to «abnormal or
artificial», while REMIT refers only to «artificial». Abnormal
must be considered to deviate from normal, while artificial
must only deviate from what would have been the case if the
abusive actions were not undertaken
• No requirement to the size of the deviation
• Is it possible to «secure» the price at an artificial level without
entering into a transaction?
– Yes, even a single order may secure the price, e.g. an order at the end
of the trading day may secure the closing price.
Definition of «attempt to manipulate
the market»
“entering into any transaction, issuing any
order to trade or taking any other action
relating to a wholesale energy product with
the intention of:”
• Taking any other action is not mentioned in the
definition of market manipulation, thus if an
intention is proven, also “any other action” may
be a breach of REMIT
• Thus, your intentions are relevant, not your
actions or their consequences. The only
requirement is that there is an action.
Article 5 – Prohibition of Market Manipulation
«Any engagement in, or attempt to engage in, market
manipulation on wholesale energy markets shall be
prohibited»
• Is it possible to do something that falls under the definition of
Market Manipulation without engaging in manipulation?
• Strictly speakig, the wording of Article 5 does not provide a
prohibition of «attempted market manipulation». It may therefore
be unclear whether it is prohibited to:
– Attempt to do what is described in the definition of «market
manipulation», or
– Do what is described in the definition of «attempted market
manipulation», or
– Both of the above
• Example: Is it prohibited to attempt to disseminate information
through the media which is likely to give false or misleading signals?
Summary
• According to the wording of REMIT, if an action,
order or transaction sends a false signal, it can be
market manipulation even if it was:
–
–
–
–
not intentional
not caused by any negligence
not likely to send a false or misleading signal
not likely to, and did not, have a negative impact on
the market (i.e. no one acted or was likely to act on
the false signal)
• Necessary with guidance to ensure a common
EU-approach