Thu Nov 9th, 2006 at 05:49:46 AM EST
In the US "Unacceptable Market Manipulation" is a felony.
A fellow regulator at the London Metal Exchange joked to me when I was Director of Compliance & Market Supervision at the UK's International Petroleum Exchange that this implied that there was such a thing as "Acceptable" Market Manipulation - and my response to him was that he had just defined "Trading".
This came home to me about six years ago when I assisted the defence of a trader accused of manipulating IPE settlement prices. Over the course of the case - but too late for him - it emerged that it was the customers of the market who were manipulating the settlement price and I made a formal complaint which - because of my former status - led to the appointment of a Commissioner by the IPE.
Unfortunately I alleged "systematic" manipulation which the Commissioner took to mean one or two traders doing it most of the time - when in fact I should have said "systemic" - ie most of the traders doing it some of the time. It was so rife that the individual traders ("locals") called it "Grab a Grand". They made profits at the expense of the manipulating traders - who were quite happy to lose "on-exchange" because they made small fortunes "off-exchange" on deals priced against the manipulated "settlement price".
So the IPE was whitewashed, I was discredited and lost just about everything I had ("you'll never work in this town again"). But it became clear that not only did the IPE know the trader was not responsible for the actions of the customer whose orders he was filling but they had actually reported that customer's conduct to the Financial Services Authority, who at that time had no jurisdiction over customers. The IPE did not see fit to inform the Disciplinary Tribunal of this, naturally, which was cynical, indeed scandalous, conduct on their part.
The fact of the matter was I could not be seen to be correct, because it would have "brought the market into disrepute" Old Boy.
AVery British Solution ensued: the rules were quietly changed, one or two of the locals were admonished, the IPE - who had changed from a "mutual" to a "for profit" announced good profits (the "settlement" trading was huge) and the person responsible at the Treasury has since moved on to great things, while the person responsible at the FSA now operates a hedge fund.
And the then CEO of the IPE now runs Lloyd's of London, of course.
You really couldn't make it up.
As a result of this, in June 2001 I wrote to the Iranian Central Bank governor telling them Iran was being ripped off, and the whole "Oil Bourse" project was the eventual result.
All good stuff.
But of course, it's not just the producers who lose - it's consumers as well, and I was contacted by the US Senate sub-Committee on Investigations who were investigating the (North Sea) Brent contract and they sent two investigators to London (to see me and others), and I had a whole afternoon with them.
Unfortunately, just at the crucial point, the Republicans took legislative control and that was effectively the end of it - a damp squib of a Minority Report was the only outcome.
So the people responsible for manipulating global oil prices were now in control of all of US governance and have been for the ensuing six years.
All that ended two days ago.
The opportunity has now arrived - if the Democrats have the balls - for a comprehensive investigation into the operation of the global oil (indeed, energy) market and its effect on the US consumer. Several state Attorney Generals have been bouncing up and down - particularly when gasoline was $3.00 a gallon, but none of them have the resources or expertise to get to the bottom of it.
There is the structural issue - of the NYMEX/ICE duopoly - and then there is the issue of what is or is not acceptable market manipulation (particularly vexing at the moment in the field of credit derivatives.
And of course, how do you structure regulation in a global market place - a question to which I have given about 8 years thought, and believe as a result is relatively straightforward to answer.
Beyond that there are particular relationships and courses of conduct which I do not believe would survive scrutiny. In particular the relationship over the last 10 years between a major investment bank and a major oil trader, both household names.