Legitimate Yet Manipulative: The Conundrum of Open-Market Manipulation

by Gina-Gail S. Fletcher

Click here for a PDF file of this article

Abstract

Is manipulation possible in the absence of misconduct? This is the foundational inquiry at the heart of open-market manipulation. Open-market manipulation captures the attention of lawmakers and courts because it is market manipulation effected entirely through facially legitimate transactions. Whereas traditional, well-accepted forms of market manipulation involve deception, fraud, and monopolistic prices, open-market manipulation involves no objectively bad acts and, instead, is accomplished through permissible transactions executed on the open market. As enforcement of this form of manipulation increases, the question arises—when, if ever, is a legitimate transaction manipulative?

To the Securities Exchange Commission and the Commodity Futures Trading Commission (“the Commissions”), the answer is simple—legitimate transactions are manipulative if the trader intends to manipulate the market. The Commissions’ enforcement actions are based on the theory that the manipulative intent of the trader is sufficient to transform otherwise legitimate transactions into open-market manipulation. But this approach is fundamentally flawed. Traders may be treated differently for the same conduct under this approach, and it leaves market actors none the wiser as to when their conduct may be considered manipulative. Indeed, the Commissions’ intent-focused approach only exacerbates the chaos that currently surrounds the law of market manipulation and makes enforcement against open-market manipulation less effective.

This Article is the first in-depth analysis of the concept of open-market manipulation, and it finds the Commissions’ approach to be sorely lacking. While the Commissions are correct to conclude that facially legitimate transactions may be manipulative, the intent-centric model is untenable. Intent is an insufficient tool in identifying open-market manipulation because it does not address the most important aspect of open-market manipulation—how open-market transactions harm the markets. Thus, this Article argues that courts and regulators should, instead, coherently identify the necessary conditions under which open-market transactions are harmful to the markets. Specifically, this Article argues that only those open-market transactions that impede the markets’ efficiency and undermine their integrity should be deemed manipulative. Linking the theory of open-market manipulation to the purpose of anti-manipulation laws would provide the Commissions with more cogent principles on which to hold manipulators liable for their seemingly legitimate transactions.

Legitimate Yet Manipulative: The Conundrum of Open-Market Manipulation

by Gina-Gail S. Fletcher

Click here for a PDF file of this article

Abstract

Is manipulation possible in the absence of misconduct? This is the foundational inquiry at the heart of open-market manipulation. Open-market manipulation captures the attention of lawmakers and courts because it is market manipulation effected entirely through facially legitimate transactions. Whereas traditional, well-accepted forms of market manipulation involve deception, fraud, and monopolistic prices, open-market manipulation involves no objectively bad acts and, instead, is accomplished through permissible transactions executed on the open market. As enforcement of this form of manipulation increases, the question arises—when, if ever, is a legitimate transaction manipulative?

To the Securities Exchange Commission and the Commodity Futures Trading Commission (“the Commissions”), the answer is simple—legitimate transactions are manipulative if the trader intends to manipulate the market. The Commissions’ enforcement actions are based on the theory that the manipulative intent of the trader is sufficient to transform otherwise legitimate transactions into open-market manipulation. But this approach is fundamentally flawed. Traders may be treated differently for the same conduct under this approach, and it leaves market actors none the wiser as to when their conduct may be considered manipulative. Indeed, the Commissions’ intent-focused approach only exacerbates the chaos that currently surrounds the law of market manipulation and makes enforcement against open-market manipulation less effective.

This Article is the first in-depth analysis of the concept of open-market manipulation, and it finds the Commissions’ approach to be sorely lacking. While the Commissions are correct to conclude that facially legitimate transactions may be manipulative, the intent-centric model is untenable. Intent is an insufficient tool in identifying open-market manipulation because it does not address the most important aspect of open-market manipulation—how open-market transactions harm the markets. Thus, this Article argues that courts and regulators should, instead, coherently identify the necessary conditions under which open-market transactions are harmful to the markets. Specifically, this Article argues that only those open-market transactions that impede the markets’ efficiency and undermine their integrity should be deemed manipulative. Linking the theory of open-market manipulation to the purpose of anti-manipulation laws would provide the Commissions with more cogent principles on which to hold manipulators liable for their seemingly legitimate transactions.