Commodity Price Manipulation
The Commodity Futures Trading Commission (CFTC) actively investigates price manipulation in commodities markets. The Chairman of the CFTC emphasized that the commission “will carefully consider all available actions to help ensure market integrity and combat manipulation or fraud.” If you have information about a company or group of traders engaged in price fixing or manipulation, the whistleblower attorneys at McEldrew Young can assist you with all aspects of the CFTC’s whistleblower program, from submission of a claim to filing an application for an award.
Credit Default Swaps
Credit default swaps (CDS) are a type a derivative – a financial contract that gets its value, risk and basic term structure from an underlying asset. The market is premised on the expectation that firms referenced in CDS contracts seek to avoid defaults, and the price of a CDS instrument is therefore based on the financial health of the referenced entity. Based on recent market events, the CFTC has heightened its scrutiny of “manufactured credit events,” such as intentional default of certain debt instruments. The CFTC has emphasized that such conduct could constitute market manipulation and cause significant damage the integrity of the CDS market.
In May 2018, the CFTC and the Department of Justice began a criminal investigation into price manipulation of Bitcoin and Ethereum by cryptocurrency traders. The investigation is focused on how traders may have manipulated prices by illegal activities such as spoofing and wash trading.
“Spoofing” involves creating a large amount of orders and then cancelling them prior to execution.
“Wash trading” occurs when a trader buys his or her own orders in order to create the illusion of market demand for the purpose of attracting more buyers.
The CFTC investigates a wide range of activities and trading strategies in the energy markets. In 2017, the CFTC fined Norwegian oil producer Statoil $4 million for attempting to manipulate energy markets in 2011. The CFTC alleged that Statoil attempted to influence the price of a key benchmark for propane between October and November 2011 to benefit its market positions in and offset significant losses incurred by the company earlier that year.
The CFTC investigates other types of misconduct in the energy sector, such as: submitting false information with the intent to set index prices artificially high or low; disruption of processes used by exchanges to establish settlement prices for listed futures contracts; trading of physical commodities at below-market levels to influence prices of related derivative contracts; and establishing a dominant position in a commodity to disrupt the delivery process on a related futures contract.
The CFTC investigates banks and financial institutions for manipulation of precious metals prices that can affect the setting of benchmark prices for those metals. For years, the twice-daily “price fixes” for gold, silver, platinum and palladium have been set in conference calls between major banking institutions. These price fixes are used by metal producers and consumers, and in financial instruments such as exchange-traded funds.
Following allegations involving manipulation of price-setting mechanisms in the gold and silver markets, new initiatives were proposed to reduce the possibility of fraud in setting financial benchmarks. ICE Benchmark Administration eventually transitioned from a conference call-based system to an independent electronic auction process for setting the gold and silver benchmarks.
Price manipulation can take many different forms and affect the market for virtually any traded commodity. The CFTC is highly receptive to receiving information about new and emerging types of fraud in the futures markets. Whistleblowers are frequently insiders who first discover evidence of misconduct involving price manipulation. If you provide information to the whistleblower program, the CFTC will thoroughly investigate your claim and may pursue an enforcement action that leads to a reward.
Forms of Price Manipulation
There are a number of illegal trading techniques that can artificially raise or lower the price of a commodity, such as wash trading and spoofing. These practices are prohibited in order to protect market participants who rely on the accuracy and validity of bids, offers and transactions as actual evidence of supply and demand.
Supply & Demand Manipulation
Large companies and traders have the ability to take large positions in a particular commodity segment to the extent that they can drive up the price. For example, a large diamond producer that dominated the market for most of the 20th century, used its position to influence the international diamond market. The company first tried to convince independent producers to join its single channel monopoly. When that plan failed, the company flooded the market with diamonds similar to those of non-cooperating producers in an effort to lower prices. The company later purchased and stockpiled diamonds produced by other manufacturers, as well as surplus diamonds, in order to raise prices by limiting supply.
International regulators have investigated allegations related to the improper reporting of commodity prices to establish benchmark prices that did not accurately reflect market pricing. The Wall Street Journal reported on traders who sold small quantities of oil at a discount and then reported the price to the entity responsible for setting benchmark prices. Later in the same week, the traders made a large purchase at a discounted price after the oil benchmark price was lowered as a result of their reports of the discounted sell orders. The traders realized a profit from the discounted purchase of their large trade order that far exceeded the losses incurred by selling the smaller quantities at below-market prices.