Continuing to lobby the Commodity Futures Trading Commission (CFTC) to adopt a practical definition of manipulative market behavior as: "intentionally losing money on transactions that set (or make) a price to benefit the value of related positions that tie to (or take) that price," economists at The Brattle Group released a report titled Losing Money to Increase Profits: A Proposed Framework for Defining Market Manipulation.

The report proposes a framework for "defining, detecting, and analyzing manipulative behavior that would offer market participants and regulators a clearer, more concrete standard by which to identify or refute market manipulation." In the report Brattle economists Shaun Ledgerwood, Gary Taylor, Romkaew Broehm and Dan Arthur expanded upon their recently submitted comments to the CFTC in response to the Notice of Proposed Rulemaking on market manipulation.

The economists pointed out that the Securities and Exchange Commission, Federal Energy Regulatory Commission, Federal Trade Commission and CFTC have similar statutes prohibiting market manipulation through the use of fraudulent methods. Because the definition proposed by Brattle characterizes manipulation as a type of transactional fraud actionable under all of these statutes, adoption of this definition could harmonize enforcement actions across agencies, cases and statutes, the economists wrote. It also would make it possible private parties to initiate manipulation-based litigation

"Market participants will benefit from the resulting certainty and consistency, as will the practitioners who can unify their practices to support a common framework for compliance," the report said. "This could save the scarce resources of enforcement agencies and the internal compliance divisions of market participants. It will also promote clarity with respect to the legitimacy of transactions in the normal course of business, improve compliance, and increase the liquidity and efficiency of the markets over time."

The CFTC in the coming months is expected to issue final rules concerning multiple provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including Rulemaking 23, which addresses market manipulation. The Brattle economists note that whether this rulemaking places the Commission in a more or less aggressive position concerning future enforcement actions is not as relevant as the fact that private manipulation-based litigation under the new provisions will be possible.

"Irrespective of the agency's ultimate rules, market participants must be aware that they can potentially be found liable for damages under the new fraud-based anti-manipulation provisions," said Ledgerwood. "Our framework is based on a straightforward economic model that demonstrates the mechanics of how a market manipulation can be defined, analyzed, and detected or refuted."

Irrespective of which way the CFTC addresses market manipulation and the rest of the Dodd-Frank reform in the coming months, there is the very real concern that the Commission could have a difficult time of implementing and enforcing the new rules due to budget woes. Last week a number of commissioners weighed in on the repercussions if the deep budget cuts proposed by the House for fiscal year 2011 are passed (see Daily GPI, Feb. 25).

"All of these things [proposed reforms] that we've been doing...will mean nothing; they'll mean squat; they'll be diddly...if we don't get the resources to do the job," CFTC Commissioner Bart Chilton said.

"We're going from roughly $5 trillion in annualized [futures] exchange trading to...hundreds of trillions in oversight. To think that we can do that without another cent is crazy...We will be [particularly] vulnerable in the regulated futures market to fraud, abuse and manipulation if we don't receive at least the current funding. If we get cut, we are going to be in a world of hurt," he added.

A budget resolution passed by the House would slash the initial annualized budget of $168 million for the CFTC in the current fiscal year to about $112 million (see Daily GPI, Feb. 23). As a result, the agency would be forced to cut its current staff of 680 to fewer than 440, which would make it difficult for it to enforce the reforms in the Dodd-Frank bill, CFTC Chairman Gary Gensler told Congress last month (see Daily GPI, Feb. 16).

For more information on Brattle's report, Losing Money to Increase Profits: A Proposed Framework for Defining Market Manipulation, visit

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