As part of our series on REMIT, we discussed wash trades, layering and spoofing, as well as transactions involving fictitious devices or deception. We now turn our attention to two more forms of market abuse – collusion and price-rigging – that can have a notable negative impact on markets. In this article, we’ll define these forms of abuse, and explain how while they do overlap, collusion isn’t simply about just price-setting, and price-setting doesn’t always involve collusion.
The significance of collusion
Collusion refers to different people or companies working together to manipulate prices or markets. For example, in a wash trades market, participants enter into fraudulent arrangements regarding the sale or purchase of a wholesale energy product so as to benefit only parties who are acting in collusion. Collusion does not benefit customers at large.
Collusion takes place in every market. In 2014, six banks — including Citigroup and JPMorgan Chase — were fined a massive $4.3 billion because of collusion in which banks colluded to boost profits. The collusion involved the use of chat rooms for market manipulation. A group of traders using names such as The Bandits’ Club and The Cartel communicated on private chat rooms and used this to share information related to trading positions, to agree on strategies to manipulate particular Forex benchmark rates and to alter their positions so as to benefit the group.
Collusion is usually intended to affect the price of markets (hence the crossover with price-rigging or fixing). However, this is not always the case. It may also be for purposes such as to earn traders bonuses in scenarios where they are remunerated according to trade volume. Collusion of course, must have at least two different actors and parties colluding while price setting can be a sole trader.
Price-fixing in action
Price-fixing or rigging covers any actions that seek to fix the price of a market at a certain level. This could involve misleading claims or the hiding of certain facts in a way that manipulates the market through concealing information. This type of market manipulation may involve disseminating information through media channels that are false or misleading.
This would not necessarily have to involve multiple actors colluding in order to artificially inflate interest in a certain market, but may rather involve sole rogue traders. For instance, in November 2015 an individual trader in the commodities market was criminally convicted of spoofing and given a three-year prison sentence. The trader had used a computer program to place orders of various sizes on opposite sides of the commodities market. This was intended to create artificial movement in the market by misleadingly making it appear that there were more supply and demand than there really was.
However, collusion can happen in other scenarios involving the use of insider information. Similarly, abusive practices such as pre-arranged trading require multiple commodity dealers colluding with one another to trade at prices agreed in advance. This collusion excludes other dealers from the market.
Price-fixing is illegal for the same reason that monopolies are banned under antitrust laws: in a competitive market environment, prices cannot be dictated by a small number of actors.
Invest in the right tools for the job
More than ever, authorities are clamping down on the kinds of abusive behavior covered both by collusion and price-rigging/fixing. A growing number of fines being handed out show that authorities are keen to make an example of bad actors. For that reason, companies must ensure that they have the right surveillance tools in place.
This is a crucial part of regulatory compliance, and companies that oversee non-compliant behavior on the part of traders (even when they have not explicitly condoned it themselves) are liable to large fines that dwarf the cost of any investment into the RegTech tools that would have prevented such an incident taking place, to begin with.
When times are tough and markets are turbulent — as has been the case in the time of COVID-19 and its economic impacts — there may be more incentive for collusion between normal competitors when it comes to prices. For the same reason, individual traders may have opportunities to illegally affect the price of markets.
As a result, more than ever it is important to watch out for collusion and price-rigging/setting in action — and to stamp it out wherever it’s discovered. If companies don’t do it, you can be sure that regulators certainly will.