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January 04, 2011
Brattle Principals Submit Comments to the CFTC on the Notice of Proposed Rulemaking on Prohibition of Market Manipulation

On January 3, 2011, Dr. Daniel Arthur, Dr. Romkaew Broehm, and Mr. Gerald Taylor, principals of The Brattle Group, submitted comments to the Commodity Futures Trading Commission (CFTC) on the CFTC’s Notice of Proposed Rulemaking on the Prohibition of Market Manipulation (NOPR). The comments also included a paper authored by Brattle senior consultant Dr. Shaun Ledgerwood that provides a framework for detecting market manipulation. The CFTC has proposed two new rules to its anti-manipulation regulation — 17 CFR Part 180 §§ 180.1 and 180.2. The proposed rules would prohibit fraud-based market manipulation (§ 180.1) and other forms of manipulation that distort prices (§ 180.2) for which the Commission would continue to rely upon the traditional four-part framework developed in the context of market power-based manipulation. Arthur, Broehm, and Taylor commented that the NOPR lacks a workable definition of market manipulation for use in identifying actual manipulated transactions in commodity markets. Market manipulation in commodity markets often has elements of both fraud and market power that encompasses misinformation intentionally injected into the market and an alteration in price effected by the manipulator. They recommend that the CFTC adopt a definition of manipulation that focuses upon anomalous price-making behavior intended to benefit the manipulator’s related price-taking positions. This definition would provide behavioral guidance to market participants and sharpen the boundary between legitimate and illegitimate activities. It would also provide a conceptual framework currently lacking for quantitative assessment of manipulator incentives and gains, and for measurement of potential market impacts of manipulative activity. The additional clarity provided by the definition regarding manipulative activity and its effects would enhance the deterrence value of the Commission’s regulatory efforts. Even with a workable definition of manipulation, the authors caution that the Commission will have to address difficult questions at both the actor and policy levels and target its limited detection and enforcement resources. Striking an appropriate balance between regulatory objectives and legitimate market interests in this complex, dynamic environment will be a continuing challenge. Please use the link below to download the comments and Dr. Ledegerwood's paper, "Screens for the Detection of Manipulative Intent.”