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A Framework for the Analysis of Market Manipulation

Author

Listed:
  • Ledgerwood Shaun D.

    (The Brattle Group)

  • Carpenter Paul R.

    (The Brattle Group)

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.

Suggested Citation

  • Ledgerwood Shaun D. & Carpenter Paul R., 2012. "A Framework for the Analysis of Market Manipulation," Review of Law & Economics, De Gruyter, vol. 8(1), pages 253-295, September.
    • Handle: RePEc:bpj:rlecon:v:8:y:2012:i:1:n:10
    DOI: 10.1515/1555-5879.1577
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    References listed on IDEAS

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    Cited by:

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    2. Dongyu Chen & Xiaolin Li & Fujun Lai, 2023. "Shill bidding in lenders’ eyes? A cross-country study on the influence of large bids in online P2P lending," Electronic Commerce Research, Springer, vol. 23(2), pages 1089-1114, June.
    3. Carole Comerton-Forde & Tālis J. Putniņš, 2014. "Stock Price Manipulation: Prevalence and Determinants," Review of Finance, European Finance Association, vol. 18(1), pages 23-66.
    4. Laurence E. Blose & Vijay Gondhalekar & Alan Kort, 2018. "Overnight versus day returns in gold and gold related assets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 526-549, July.
    5. Charles A. Holt & William M. Shobe, 2013. "Investigation of the Effects of Emission Market Design on the Market-Based Compliance Mechanism of the California Cap on Greenhouse Gas Emissions," Reports 2013-01, Center for Economic and Policy Studies.
    6. Enrique Mart'inez-Miranda & Peter McBurney & Matthew J. Howard, 2015. "Learning Unfair Trading: a Market Manipulation Analysis From the Reinforcement Learning Perspective," Papers 1511.00740, arXiv.org.

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