Author: Azizur Rahman
31 January 2021
5 min read
Besides facilitating the transfer of stocks, currencies, futures, and other financial instruments between buyers and sellers, a basic function of financial markets is to allow participants to communicate information to one another about their subjective view of a particular instrument’s price. If a trader is willing to place an actionable offer to buy a Treasury futures contract for $X, for example, she is implicitly signalling to the market that, in her view, the contract is worth approximately that amount (at least insofar as buying it at that level relates to her overall position and trading strategy).
“Manpulation definition - The term ‘manipulation’ may, in short, be applied to any practice which has as its purpose the deliberate raising, lowering or pegging of security prices. Buying and selling in themselves do, or course, affect price, but in a free and open market this is a natural consequence and not their pre-conceived purpose. Manipulation leads to an artificial and controlled price. Such a price, which is broadcast in the form of a market quotation, then, does not reflect an independent appraisal of the security in respect to the floating supply, nor to the immobile holdings throughout the country.”5
By centrally aggregating the pricing opinions of many individual traders and investors, financial markets allow buyers and sellers to reach a rough consensus on an asset’s current market value (i.e., the approximate midpoint between supply and demand at any given moment). In this way, markets allow an asset’s price to be “discovered” through the transmission of the prices at which various buyers and sellers are willing to transact which, in turn, presumably reflect the proprietary analyses of those buyers and sellers about an asset’s value. As the US Supreme Court described this phenomenon, “[W]ell developed markets are efficient processors of public information. In such markets, the ‘market price of shares’ will ‘reflect all publicly available information.’”1 In other words, “The idea of a free and open public market is built upon the theory that competing judgments of buyers and sellers as to the fair price of a security brings about a situation where the market price reflects as nearly as possible a just price.”2 For a market’s price discovery mechanism to function properly, of course, investors must have faith in the integrity of the pricing information transmitted by their fellow market participants.3
Within this framework, market manipulation can be understood as any act which “obstructs the operation of the markets as indices of real value.”4 As two prominent law professors analysing the market activity that helped bring about the Great Depression put it:
“The methods and techniques of manipulation are limited only by the ingenuity of man. The aim must be therefore to discover whether conduct has been intentionally engaged in which has resulted in a price which does not reflect basic forces of supply and demand.”
-- Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971)
Regulators and courts in the U.K. have described market manipulation as it is understood under English law as being comprised of three elements:
While these concepts are relatively easy to grasp in theory, market overseers have struggled to define exactly what separates lawful from unlawful market conduct. As such, the law relating to market manipulation has largely evolved on an ad hoc basis, with interpretations as to what is permissible and what is not changing over time. Because “[s]ophisticated economic justification for the distinctions made in this area of the law may at times seem questionable,” observed the US Seventh Circuit, “Sometimes the ‘know it when you see it’ test may appear most useful.”7 The unpredictability of this subjective approach creates obvious problems for market participants. Complicating matters further is the fact that the means by which manipulation can be accomplished are getting more complicated. The increasing interconnectedness of global markets and the involvement of algorithmic traders expand the opportunities for market manipulation and makes detecting and investigating it more difficult. For example, many recent market enforcement actions have involved manipulation in one jurisdiction by persons physically located elsewhere, or transactions in one market designed to manipulate the prices in another.
As regulators try to keep pace with a moving target, financial institutions, traders, and investors risk having their strategies—even those that might be commonplace—called into question after the fact. One need look no further than the recent FX, Libor, and spoofing prosecutions for examples of market participants being selectively penalized for engaging in widespread, ostensibly accepted market practices. To prepare for possible regulatory scrutiny, it is essential for traders, compliance professionals, and defense counsel to remain current on the regulatory frameworks applicable in each of the jurisdictions in which they, or their companies and clients, are active. The purpose of this primer is to provide an overview of the market manipulation regulations in two of the world’s largest and most active markets: the United States and United Kingdom.
A Primer on Market Manipulation Regulations in the U.S. and U.K." by Rahman Ravelli.
Chapter.1 - What is Market Manipulation?
Chapter.2 - Market Manipulation under Federal US Law.
Chapter.3 - Market Manipulation in the UK.
Download the complete PDF guide .
Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.