How to think about market manipulation



The phrase ‘market manipulation’ is part of the daily news cycle, reported across a growing list of commodity and financial markets. Unfortunately, a universal understanding of manipulative behaviour does not currently underlie the allegations. The patchwork of enforcement settlements recorded to date reflects an “I know it when I see it” approach that provides market participants with little guidance as to what behaviours might be considered manipulative.

Without a logical framework, the requirements for proving manipulation are also lacking. Simply examining texts and voice recordings is insufficient as it is fraught with error arising from either the misinterpretation of, or lack of, economic logic in the colourful language adopted by traders. From a litigation and regulatory management perspective, analysing statements is very expensive and most importantly is prone to mislabelling bad trading practices (e.g., money losing trades wrapped with a veneer of trader hutzpah) and instead should be left as the final and not the first step in an analysis.

We have developed an economic framework which relies on a series of necessary tests for a particular trading pattern to be manipulative. This framework is being broadly adopted because at a summary level it is logical and hence easily communicated at the agency, executive and attorney level. The complexity of data and financial analysis can be abstracted so that a meaningful dispute resolution can be pursued by the relevant parties without getting bogged down in the details.

A framework for the analysis of market manipulation

Our framework describes a manipulation using three elements: a ‘trigger’ which is a distorted market outcome that is linked causally by a ‘nexus’ to a profitable outcome, or ‘target’. Proof of a manipulation therefore requires the demonstration that the manipulator intentionally acted in a manner designed to cause (trigger) a change in some market mechanism (nexus) to alter the value of one or more positions (target) that benefit from the change.

Triggers can include: (i) outright fraud, such as filing a fraudulent report or failing to divulge a material fact; (ii) the exercise of market power, typically executed through an act of withholding; or (iii) uneconomic trading, shown by trading excessive quantities in the market to intentionally incur a loss to bias a market outcome. Behaviour outside these three categories generally serves a standalone legitimate business purpose and thus cannot be considered manipulative. The nexus of a manipulation can be any market-related mechanism that is subject to bias by the manipulation trigger, such as a market benchmark price or quantity traded. The manipulation’s target is then one or more positions that are designed to benefit from the bias created, such as financial derivatives tied to an index price or cross-market payments tied to the quantity traded.

Our models differentiate uneconomic trading from legitimate activities like hedging based upon the logic that target revenues derived from the manipulation must exceed the triggering loss for the manipulation to be profitable overall. We refer to this as ‘financial leverage. Analysis of financial leverage can distinguish legitimate trading losses from uneconomic, manipulative behaviour. For example, suppose a trader is suspected of intentionally losing $1m on trades that bias an index price, but is shown to have recovered $800,000 from other positions tied to that price. As long at the ratio of losses to profits is one-to-one or less, the behaviour cannot be argued to be manipulative because there is no profit from the behaviour across the trader’s portfolio. Conversely, as the amount of the trader’s financial leverage in the manipulation – i.e., the ratio of profits produced from the target in proportion to the trader’s losses in the trigger – grows to be systematically above one, the trader’s behaviour potentially becomes problematic.

Use of the framework in agency enforcement actions

Because a presumption of transactional legitimacy must follow all open market trades in a free economic system, demonstration of the assemblage and movement of the framework’s three components is a necessary, but not sufficient, requirement for proving a market manipulation. Specifically, proof that a market actor controlled and operated (or attempted to operate) the three framework components to its benefit is necessary to demonstrate the manipulation’s cause and effect, but is not dispositive proof of the actor’s manipulative intent.

Intent is usually established through a combination of objective evidence (e.g., voice recordings or emails) in addition to economic evidence showing a suspicious pattern of behaviour consistent with the framework. But this analysis is expensive and only needed if the necessary objective criteria have been evaluated. To do otherwise leads to enforcement actions that mislabel legitimate behaviour as manipulative due to the identification of ‘false positives’ simply from a trader’s language that may have no economic logic or impact.

Application of the framework to the Libor, FX and commodities manipulations

Our framework is applicable to addressing abusive market behaviour caused by the exercise of market power (i.e., withholding), transactional fraud (i.e., uneconomic trading) or through outright fraud (i.e., false reporting).

The type of alleged behaviour associated with the trigger is highly relevant to associated legal claims for relief brought in related litigation. For example, as outright fraud is alleged to have triggered the Libor manipulation, it follows that the antitrust claims were stripped from the associated class action while the fraud-based claims were allowed to proceed. This logic may also apply to the alleged Forex manipulation, for the alleged collusion (through information sharing) could be said to facilitate transactional fraud through front running uneconomic trades. By comparison, it is possible that no fraud claims will survive in class actions brought concerning the alleged aluminium market manipulation because the alleged trigger is an act of withholding; in fact, it is possible that this case should not be considered a ‘manipulation’ because withholding is a traditional antitrust allegation.


The analytical details of applying our framework are of course complex, but at a high level it provides an economically coherent basis for business people, risk managers, traders, regulators and attorneys to discuss and analyse manipulation cases. The logic is portable across cases, agencies, statutes and products and highlights the proof or disproof of manipulative activity. We have found that this clarity reduces regulatory, litigation and compliance costs by focusing on the things that matter and avoiding the creation of false positives.


Michael Cragg and Shaun Ledgerwood are principals at The Brattle Group. Mr Cragg can be contacted on +1 (617) 234 5721 or by email: Mr Ledgerwood can be contacted on +1 (202) 419 3375 or by email:

© Financier Worldwide



Michael Cragg and Shaun Ledgerwood

The Brattle Group

©2001-2019 Financier Worldwide Ltd. All rights reserved.