Brattle Group Economists Propose Post-REMIT Definition of Market Manipulation That Would Unify European and US Enforcement Actions

LONDON, June 29, 2011 -

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
at href="www.brattle.com/">www.brattle.com.

The Brattle Group provides consulting services and expert
testimony in economics and finance to corporations, law firms and
public agencies worldwide.  Areas of expertise include
antitrust and competition, valuation and damages, utility
regulatory policy and ratemaking, and regulation and planning
in network industries.  For more information, please visit href="www.brattle.com/">www.brattle.com.

Stephanie Schwartz, The Brattle Group, +1-617-864-7900, Stephanie.Schwartz at brattle.com