REMIT best practices: transactions involving fictitious devices or deception

In previous articles in this series, we discussed wash trades and layering and spoofing, both fraudulent trading activities prohibited in the European Union under REMIT (Regulation on wholesale energy markets integrity and transparency) rules. In this article, we’ll dive into additional types of transactions that can artificially affect the perceived value of particular wholesale energy stocks, driving them up so as to gain an illegal advantage for the fraudster traders who participate.

Here’s what you need to know about them — and the best practices when it comes to stamping them out.

Scalping and pump-and-dump

In some cases, market manipulation involving fictitious devices and deception takes place through fraudulent media and internet communication channels.

Another common form of deceptive trading that falls under this banner is a “pump and dump” scam. This is a type of securities fraud in which the price of an owned stock is inflated through false information so that the stock can then be sold at a significantly higher price than it was purchased at.

Common communication channels used by fraudsters in a pump and dump scheme could involve anything from social media messaging to spam email, potentially containing bad data. If the pump and dump scheme works as planned, other market participants buy into the misleading information and invest in the wholesale energy product, thereby driving up its price. (Hence “pumping” up the price and then “dumping” the stock.)

Circular trading and pre-arranged trading

This is damaging because it artificially manipulates the market by making it appear that certain security has liquidity, suggesting there is market interest in a stock where they might be none. This trading can cause more investment in a stock because others could buy into it thinking there must be a legitimate reason for the interest and activity.

Yet another fictitious trading technique is pre-arranged trading. In this practice, two commodity dealers trade with each other at pre-arranged prices. This kind of trading can be used to gain a tax advantage or exclude others from the market. It can fraudulently limit risk and be more profitable to the dealers at the expense of the open market.

All banned under REMIT

All of these types of trades in the wholesale energy market fall under the heading of price positioning. They are banned under REMIT Article 5 rules stating that, “Any engagement [by a participant in the market] in any attempt to engage in, market manipulation on wholesale energy markets shall be prohibited.”

Although REMIT rules have been in place since the close of 2011, relatively little action was taken for the initial seven years. That is rapidly changing now as a result of increased enforcement and reporting of suspicious behavior by ACER, Europe’s Agency for the Cooperation of Energy Regulators.

The most recent ACER enforcement decision took place in March 2020 when several energy companies, including the UK-based InterGen, were fined 42.5 million euros ($50 million). This was the result of abuses including market manipulation in which InterGen staff sent misleading signals about power plant capabilities. The fine (termed a “strong message”) was based on demonstrated weaknesses in InterGen’s procedures and internal controls when it comes to REMIT compliance. Overall enforcement decisions involving Article 5 violations are greatly increasing. This trend is not going to reverse any time soon. In fact, enforcement will only increase.

Compliance is mandatory

By law, companies must comply with REMIT rules. Penalties are not only leveled at individual traders involved with the smooth running of the European wholesale energy markets but also the companies they work for. They must be monitoring at all times to ensure compliance — and in a position to provide information about regulatory compliance at a moment’s notice.

Along with providing proper guidance to traders about how to trade and document their trading behavior, it is essential that companies invest in comprehensive surveillance systems. And that they do it before any kind of potentially costly investigation has to be launched. Millions of dollars in fines makes the cost of an effective surveillance system look minuscule by comparison.