Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Wednesday, June 27, 2012

market manipulation

Market manipulation is bad. Even the name sounds bad. Besides being an opportunity for one party (or, cabal?) to profit from a VERY unfair advantage of others, it erodes trust in the market. Trust in the market is essential to the working of the economy. Individuals and companies of all stripes come to the public capital markets for everything from buying a house or retiring to making payroll or financing expansion to lowering risk or buying groceries (ok, buying groceries is a little indirect, but i could explain it at a stretch). Lack of faith in those markets makes it hard and expensive to reach, slowing growth.

A particularly fascinating case of market manipulation involves Barclays Capital manipulating LIBOR. This email exchange is fascinating look at how traders fudged numbers on the LIBOR survey to benefit their own positions. As their position values were calculated on this rate, moving the rate up or down a basis point could be the difference between making profit or loss.

Alas, market manipulation can cut both ways. Barclays is a huge bank, as such it will invariably hold opposing positions as it attempts to hedge its risk. These emails show that at times, different traders needed the needle to move different directions. Not only was the manipulation wrong and illegal, it was stupid and unproductive.

The meaning of this manipulation is huge, and it is important that it was caught. There is a huge amount of data in the marketplace and it can be very difficult to detect the needling fraud in the haystack of transactions. HFTs and Hedge Funds often use very advanced computing techniques to detect arbitragable patterns in market data - it is time that regulators stepped up to that plate as well. Collecting data and keeping it transparent has been and will remain key to protecting the marketplace from fraud and manipulation.

For a great overview of LIBOR and how it comes to be, check this primer!