Rethinking Open- and Cross-Market Manipulation Enforcement

Abstract

The modern stock market bears little resemblance to its form when the statutes designed to regulate it were first enacted. In the twenty-first century, the market is almost entirely digital—replete with interconnected instruments and exchanges—spanning multiple jurisdictions and products. As recently as 1969, trades could take over a week to clear; now in the era of high-frequency trading, they are effectively instantaneous. With the influx of more exchanges and instruments that trade on those exchanges, transacting at dizzying speed and magnitude, new and more difficult-to-identify forms of market distortion have emerged. Chief among those forms of distortion is open-market manipulation. Open-market manipulation—in which a trader uses facially legitimate trading methods in order to camouflage non-bona fide trades (including manipulations across markets and even in the cryptocurrency sphere)— has frustrated regulators and, in particular, prosecutors. Prosecutors and courts have struggled to fit open-market manipulation into an anachronistic statutory regime and particularly labored to prove the requisite criminal intent to manipulate in schemes comprised of facially valid trades. This failure of the law to match the conduct is exacerbated by the use of complex high-frequency trading algorithms. Since manipulative intent may often be embodied in the design of the trading algorithm itself, it presents a literal and figurative black box in certain cases. These difficulties are especially acute in the context of cross-market manipulation, in which the manipulation is based on the interplay of two different markets. In terms of its negative effects, potential magnitude, and increasing frequency, open-market manipulation, particularly cross-market manipulation, should be considered among the most volatile and dangerous forms of white-collar crime and a priority for the Department of Justice and regulators alike. This Article first identifies where the critical issues in modern manipulation prosecution lie and the split among federal circuits regarding whether open-market manipulation is even a violation of the securities laws at all. This Article then proposes solutions to these issues in the form of principles upon which regulators and judges should rely, as well as a statutory proposal to bring the regulatory landscape up to speed in an increasingly fast, complex, and volatile digital trading world. In that vein, this Article is the first to do several things. It is the first to provide an in-depth analysis of the distinct challenges involved in prosecuting open-market manipulation. It is also the first to demonstrate the particular pronounced difficulties necessarily involved in detecting, regulating, and prosecuting cross-market manipulation. Finally, it is the first to propose a tangible statutory solution to the urgent issues involved in deterring and prosecuting these forms of manipulation.