Using Virtual Bids to Manipulate the Value of Financial Transmission Rights

45 Pages Posted: 5 May 2012

Date Written: May 3, 2012


In this paper, we present a straightforward economic model that explains the incentives to manipulate nodal energy prices in a “Day 2” RTO market. The model distinguishes between legitimate market participation that increases overall market efficiency and manipulative behavior that distorts markets and reduces efficiency. The example we use is the placement of “virtual” load or supply to enhance the value of financial transmission rights. This model shows the incentives that drive a trader’s stand-alone decision to place virtual bids at a node, the change in those incentives if the trader also holds a FTR position tied to that node, and the potential profit-maximizing opportunity to lose money on the virtual bids to increase the value of the FTR position and overall portfolio. We show that intentional uneconomic trading of virtual bids to trigger a manipulation causes the divergence of day-ahead and real-time nodal prices and thus creates market distortions and inefficiencies. This model also identifies the elements needed to successfully execute such manipulations, linking the analysis to a broader framework for detecting or rejecting market manipulation. These results explain past manipulations and should assist future efforts to detect and prove or disprove manipulative trading behavior within the RTOs, irrespective of whether such oversight derives from the FERC and/or the CFTC. They also provide guidance to both compliance and enforcement efforts on how to define legitimate behavior and avoid potentially manipulative behavior to the benefit of overall market liquidity.

Keywords: manipulation, manipulate, virtual, bids, offers, load, supply, DEC, INC, transmission, uneconomic, convergence, framework, trigger, target, nexus, screens, CFTC, FERC, swap, RTO, enforcement, compliance, node, zone, LMP, congestion, energy, loss, Dodd-Frank, day-ahead, real-time, Constellation

JEL Classification: D4, D43, D44, D60, D61, D81, D84, G13, G14, G18, K0, K2, K23, K42, L1, L4, L51, L9, L94 Q4, Q41, Q48

Suggested Citation

Ledgerwood, Shaun D. and Pfeifenberger, Johannes, Using Virtual Bids to Manipulate the Value of Financial Transmission Rights (May 3, 2012). Available at SSRN: or

Shaun D. Ledgerwood (Contact Author)

The Brattle Group ( email )

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Johannes Pfeifenberger

affiliation not provided to SSRN ( email )

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