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Screens for the Detection of Manipulative Intent

Shaun D. Ledgerwood

The Brattle Group

December 19, 2010

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

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Date posted: December 20, 2010 ; Last revised: July 24, 2011

Suggested Citation

Ledgerwood, Shaun D., Screens for the Detection of Manipulative Intent (December 19, 2010). Available at SSRN: https://ssrn.com/abstract=1728473 or http://dx.doi.org/10.2139/ssrn.1728473

Contact Information

Shaun D. Ledgerwood (Contact Author)
The Brattle Group ( email )
Suite 1200
1850 M Street NW
Washington, DC 20036-340
United States
(202) 419-3375 (Phone)
HOME PAGE: http://www.brattle.com/
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