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June 07, 2013
Brattle Senior Consultant Shaun Ledgerwood Authors Article on Market Manipulation

Brattle senior consultant Shaun Ledgerwood recently authored an article for Energy Risk Magazine likening the use of uneconomic trading in energy and commodity markets to equivalent behavior in sports. Using events such as the 1919 Chicago “Black Sox” Scandal, Dr. Ledgerwood analogizes a trader’s willingness to lose money in one market to attain a greater benefit in another to the willingness of a sports team to intentionally throw a match to benefit from side wagers made for the opposing team.

A key feature of intentional uneconomic trading is its fraudulent nature. A trader seeking to place trades that are profitable on a stand-alone basis will face competition, but a trader who intentionally seeks to lose money will face no competition whatsoever in achieving his goal. Such uneconomic acts then usually fall under the radar because losing is dismissed as “just part of the game.” Notice is finally taken when the behavior involved is egregious and offensive enough to beg for a response from a regulator. Thus, whereas baseball banned such fraudulent behavior over 90 years ago, similar protections for our energy and commodities markets were installed only after the California Power Crisis (resulting in EPAct 2005) and 2008 Financial Crisis (resulting in Dodd-Frank and similar laws in the EU).

As the Federal Energy Regulatory Commission, Commodity Futures Trading Commission and European regulators aggressively enforce these new rules, some commodity and energy traders are struggling to come to terms with the associated compliance requirements. In the article, “Uneconomic trading and market manipulation,” Dr. Ledgerwood attempts to assist these compliance efforts by explaining all such manipulative behavior through a common framework designed to simplify the understanding of manipulative cause and effect.