A Framework for Analyzing Market Manipulation

The Review of Law & Economics (DeGruyter/Berkeley Electronic Press), Forthcoming

45 Pages Posted: 18 Apr 2011 Last revised: 23 May 2013

Shaun D. Ledgerwood

The Brattle Group

Paul Carpenter

The Brattle Group

Date Written: June 5, 2012

Abstract

Market manipulation is a poorly understood phenomenon, due in part to legal standards that categorize manipulative behavior as either an act of outright fraud or as the nebulous use of market power to produce an artificial price. In this paper, we consider a third type of behavior that can trigger a manipulation – uneconomic trading. We demonstrate that uneconomic trading has characteristics of both fraud and market power, thus providing a foundation for analyzing manipulative behavior in a manner consistent across “fraud-based” and “artificial price” statutes. We develop an analytical framework to assist this process that describes price-based manipulation as an intentional act (the “trigger”) made to cause a directional price movement (the “nexus”) to benefit financially leveraged positions that tie to that price (the “target”). This framework could simultaneously improve market liquidity and compliance by providing definitional and analytic certainty concerning what behavior does and does not constitute a market manipulation.

Keywords: manipulation, framework, derivative, swap, leverage, legitimate, noise, information, anomalous, CFTC, FERC, SEC, FTC, REMIT, fraud, compliance, enforcement, Dodd, reform, uneconomic, trigger, target, artificial, index, liquidity, nexus, Amaranth, corner, inefficiency, inelastic, harm, screen, hedge

JEL Classification: D43, D44, D6, D81, D84, F36, G1, K00, K2, K42, L1, L4, L51, L9, Q48

Suggested Citation

Ledgerwood, Shaun D. and Carpenter, Paul, A Framework for Analyzing Market Manipulation (June 5, 2012). The Review of Law & Economics (DeGruyter/Berkeley Electronic Press), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1811764 or http://dx.doi.org/10.2139/ssrn.1811764

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/

Paul Carpenter

The Brattle Group ( email )

44 Brattle Street
3rd Floor
Cambridge, MA 02138-3736
United States

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