A Framework for the Analysis of Market Manipulation

Abstract

Market manipulation is a poorly understood phenomenon, due in part to legal standards that categorize manipulative behavior as either an act of outright fraud or as the nebulous use of market power to produce an artificial price. In this paper, we consider a third type of behavior that can trigger a manipulation – uneconomic trading. We demonstrate that uneconomic trading has characteristics of both fraud and market power, thus providing a foundation for analyzing manipulative behavior in a manner consistent across “fraud-based” and “artificial price” statutes. We develop an analytical framework to assist this process that describes price-based manipulation as an intentional act (the “trigger”) made to cause a directional price movement (the “nexus”) to benefit financially leveraged positions that tie to that price (the “target”). This framework could simultaneously improve market liquidity and compliance by providing definitional and analytic certainty concerning what behavior does and does not constitute a market manipulation.