Screens for the Detection of Manipulative Intent

Abstract:     
Surrounding the passage of Dodd-Frank, a noted author argues that existing market manipulation statutes cannot effectively prosecute manipulation cases because the statutes prohibit fraud, not market power. This is incorrect. While traditional economic theory can explain the incentives underlying manipulation, it is not readily adaptable to untangling the counterintuitive logic of manipulative intent. Consequently, no unifying economic paradigm exists for evaluating manipulative behavior across applications, agencies, or statutes. This void necessitates the use of opaque techniques to detect and prove (or disprove) manipulation. Compliance suffers because lack of uniformity across cases inhibits the establishment of precedent and complicates the analysis required in subsequent proceedings. To overcome this problem, I propose five tests designed to transparently identify the uneconomic behavior associated with manipulation, as supported by a paradigm developed across three progressively rigorous economic constructs. These tests could be useful in litigation contexts beyond the scope of traditional anti-manipulation enforcement actions.

Number of Pages in PDF File: 57

Keywords: Manipulation, manipulate, screens, fraud, moral hazard, Dodd, Frank, reform, CFTC, FERC, SEC, intent, artificial price, Pirrong, FTR, virtual, convergence, swap, trigger, target, antitrust, harm, RTO, condominium, trader, enforcement, index, clear, externality, Amaranth, gas, electric, CEA, power

JEL Classification: D60, D61, D62, D63, G00, G1, K2, L4, L51, L9, D81, D84, K00, K42, L12, Q48, C11, C63, D23, D44

working papers series