FTC plans a crackdown on market manipulation

Posted Aug 7th 2009 1:30PM by Connie Madon
Filed under: Insiders, Law, Oil

Here's a bit of juicy news. According to the Wall Street Journal (subscription required), The Federal Trade Commission (FTC) plans to crack down on market manipulators. They have decided to levy fines up to $1 million dollars per violation a day. The rule covers both physicals and futures.

The crackdown involves mainly the oil traders. Specifically, the language reads as follows: It bans oil market players from issuing "false public announcements of planned pricing or output decisions, false statistical or data reporting, and wash sales intended to disguise the actual liquidity of a market or the price of a particular product." The rules would also prohibit "material omissions from a statement that, although true, is misleading under the circumstances."

Another key provision of the rules includes trading that is deemed "extremely reckless." These rules become effective on November 4.

These rules cover the futures markets. At present the Commodity Futures Trading Commission (CFTC) also polices the futures markets. There is a need, therefore, for the two agencies to work together on this crackdown.

Traders argue that rules would lower the bar for prosecution and make it possible to prosecute with a "lighter burden of proof."

A study by the CFTC did conclude that there was market manipulation in the oil market last year which drove prices to extreme heights. This in turn caused the price of gasoline to rise to over $4.00 per gallon. To avoid such a rerun of last year, the FTC wants to nip the speculation in the bud.

Unfortunately with the ban is taking effect in November, there is plenty of time for the speculators to go on a trading spree before the ban takes effect.

The other factor to keep in mind is that it is very difficult to pin down outright manipulation in the markets. Oil is an international commodity and is traded throughout the world. The players work mainly on electronic screens that make "reckless trading" or manipulation hard to trace.

Do you believe that these regulations will work?

Tags: CFTC, Commodity Futures Trading Commission, Federal Trade Commission, FTC, market manipulation