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How to Define Illegal Price Manipulation

How to Define Illegal Price Manipulation American Economic Review: Papers & Proceedings 2008, 98:2, 274–279 http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.2.274 Price ManiPulation in Financial Markets †By Albert S. Kyle and S. Viswanathan* The term “illegal price manipulation” is difficult to define. Current US law does not explicitly define it. The finance and economics literature uses the term “manipulation” in an imprecise manner. This paper proposes that a trading strategy not be classified as “illegal price manipulation” unless the violator’s intent is to pursue a scheme that undermines economic efficiency both by making prices less accurate as signals for efficient resource allocation and by making markets less liquid for risk transfer. Since price effects are market wide, we treat the terms “price manipulation” and “market manipulation” as synonyms. Our definition applies equally to financial and commodities markets. “Pricing accuracy” means something different from the term “market efficiency.” Pricing accuracy measures the precision with which prices provide signals to encourage efficient resource allocation. Market efficiency refers to the difficulty of making trading profits on the basis of available information. In a market that is about to be cornered, high prices are consistent with market efficiency because they accurately forecast the probability of the corner, but not consistent with pricing http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

How to Define Illegal Price Manipulation

Kyle, Albert S; Viswanathan, S
American Economic Review , Volume 98 (2) – May 1, 2008
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References (24)

Publisher
American Economic Association
Copyright
Copyright © 2008 by the American Economic Association
Subject
Papers
ISSN
0002-8282
DOI
10.1257/aer.98.2.274
Publisher site
See Article on Publisher Site

Abstract

American Economic Review: Papers & Proceedings 2008, 98:2, 274–279 http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.2.274 Price ManiPulation in Financial Markets †By Albert S. Kyle and S. Viswanathan* The term “illegal price manipulation” is difficult to define. Current US law does not explicitly define it. The finance and economics literature uses the term “manipulation” in an imprecise manner. This paper proposes that a trading strategy not be classified as “illegal price manipulation” unless the violator’s intent is to pursue a scheme that undermines economic efficiency both by making prices less accurate as signals for efficient resource allocation and by making markets less liquid for risk transfer. Since price effects are market wide, we treat the terms “price manipulation” and “market manipulation” as synonyms. Our definition applies equally to financial and commodities markets. “Pricing accuracy” means something different from the term “market efficiency.” Pricing accuracy measures the precision with which prices provide signals to encourage efficient resource allocation. Market efficiency refers to the difficulty of making trading profits on the basis of available information. In a market that is about to be cornered, high prices are consistent with market efficiency because they accurately forecast the probability of the corner, but not consistent with pricing

Journal

American Economic Review – American Economic Association

Published: May 1, 2008

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