Surveillance by countervailing power

I have long argued that it is a mistake to think of surveillance as being done solely by disinterested regulators who have no axe to grind. As I wrote in a blog post a decade ago, “complaints by rivals and other interested parties are the best leads that a regulator can get.”

But these rivals and other interested parties can go beyond complaining to the regulator; they can take matters into their own hands. This can often be the best and most effective form of surveillance. A recent order by the US Commodities and Futures Trading Commission (CFTC) against Statoil illustrates this very well.

According to the CFTC, Statoil traders bought physical propane in the Far East with a view to push up the Argus Far East Index (FEI) which was the reference price for Statoil’s derivative contracts on NYMEX. However, Statoil’s plan to profit by creating an artificial settlement price for the Argus FEI did not materialize as hoped. The CFTC quotes one of the Statoil traders:

Also, quite a few of the players in the market have a vested interested in holding the [Argus] FEI down and they have been willing to sell cargoes . . . at discounted prices . . . Statoil have bought 5 cargoes over the last week but this has not been enough to keep the [price] up.

So one group of players are trying to rig the price down, while another set is trying to do the opposite. Their efforts neutralize each other, and the market basically policed itself. The regulator can of course watch the fun and impose a penalty on one (or even both parties), but its actions are largely irrelevant.

Incidentally, the episode also shows that market manipulation is not the exclusive preserve of evil private sector speculators: Statoil is the Norwegian government oil company.

Posted at 9:30 pm IST on Thu, 7 Dec 2017         permanent link

Categories: derivatives, manipulation, regulation

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