Brattle Economists Propose Post-REMIT Definition of Loss-Based Market Manipulation
According to a discussion paper released today by economists at The Brattle Group, the European Commission’s proposed Regulation on Energy Market Integrity and Transparency (the ‘REMIT Proposal’) highlights the need for a clearer definition of the behaviour that constitutes market manipulation in energy markets.
In response, the authors propose a definition of market manipulation and an associated economic framework that will help clarify its analysis across cases and assist in the coordination of global anti-manipulation efforts. “A clear and workable definition of market manipulation is vital to the continuing success of Europe’s energy trading markets,” says Dan Harris, a principal of The Brattle Group and co-author of the paper. “Market manipulation and fraud can undermine confidence in markets, but spurious prosecutions of legitimate hedging and trading strategies, and confusion about what is permitted, could be equally as damaging.” The framework outlined in the discussion paper defines a form of market manipulation that is of key concern in energy markets: intentionally losing money on price-making trades to benefit the value of related price-taking positions. Application of this framework would provide market participants with greater certainty concerning behaviour that is considered legitimate, and would provide regulatory agencies with a clearer mandate as to the types of behaviour that merit intervention. Its application would also improve market efficiency and liquidity by providing a clear framework for evaluating manipulative behaviour that is uniform across cases, agencies and statutes. The discussion paper notes that the new US fraud-based manipulation statutes have much in common with the REMIT Proposal. This presents an opportunity to create a coordinated multi-agency and multi-national enforcement network that minimises regulatory arbitrage and provides certainty to market participants as to the behaviour that is prohibited. The authors observe that because market manipulation is a phenomenon that is difficult to comprehensively describe, it is imperative that the rules that are ultimately adopted clearly define the behaviour that will be deemed suspicious or considered manipulative. This certainty will serve the needs of the regulatory bodies, whose scarce resources will be taxed in screening for manipulative behaviour and bringing enforcement actions when required. It will also serve the needs of the international trading community, as certainty of compliance requirements will encourage legitimate trading, thereby improving the liquidity of the markets over time and reducing the probability that a loss-based manipulation can successfully occur.
The discussion paper, “Defining Market Manipulation in a Post-REMIT World,” was authored by Brattle economists Shaun Ledgerwood, Dan Harris, Bin Zhou and Pinar Bagci and is available for download below.