From the September 01, 2012 issue of Futures Magazine • Subscribe!

Defining market manipulation

Lessons from the commodity position limit rules

Proving an improper motive market manipulation claim

Under the CEA a claim for market manipulation exists when:

  1. The defendant possessed an ability to influence market prices;
  2. An artificial price existed;
  3. The defendant caused the artificial price; and
  4. The defendant specifically intended to cause the artificial price.

A manipulation claim based on a legitimate transaction combined with an improper motive must show each of these elements.

Proof of intent and artificial price are interrelated — especially when the claimed manipulation rests on improper motive. Courts define artificial price as one that does not reflect the basic forces of supply and demand.  With no universally accepted measure or test of price artificiality, courts look at the aggregate forces of supply and demand and try to determine if something other than a legitimate factor has affected the price of the commodity. The presence of any such illegitimate factor or factors usually means the existence of an artificial price.

Wrongful intent can be a factor causing artificial price. For example, if a buyer on a commodity exchange intentionally pays more than required for the purpose of causing the price to be higher than it otherwise would, the resulting price has not been determined solely by the legitimate forces of supply and demand and thus is artificial.

Courts say that to prove intent, there must be a showing of conduct specifically undertaken to make a price or price trend in the market other than that resulting from legitimate forces of supply and demand. Often no clear evidence of that intent is available. Instead courts usually look to the circumstantial evidence surrounding the alleged manipulation and infer the needed wrongful intent from it.

The link between improper motive and artificial price has been discussed in a number of manipulation cases involving otherwise legitimate market transactions. In one case, a trader bought eggs right before the closing bell on a particular day and, for the purpose of increasing the closing price, bid at a price substantially above where the previous transactions had occurred. The reviewing judicial officer deemed that the trader’s intent resulted in an artificial price. In another, the court deemed “buying sprees” in the natural gas market enough to show both artificial price and intent to cause the price.

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