Benchmark Manipulation

Substantial scholarship has questioned whether market manipulation is impossible and regulation unnecessary. This Article challenges orthodox understandings of manipulation, showing that they reflect an obsolete view of markets. While manipulation skeptics discuss prices, markets focus on benchmarks of price—and so do the manipulators who prey upon them. Benchmarks such as LIBOR or the S&P 500 summarize market prices and they have become essential to contemporary markets. They are written directly into industrial contracts, financial derivatives, statutes, and regulations, and so their accuracy affects the economy every bit as much as the prices themselves. They are also are much easier to manipulate than underlying prices, because such benchmarks are typically derived from only a small slice of the market. For example benchmarks of exchange rates—the price of Euros and Yen—reflect only trade prices in a single venue, during a two-minute period of trading. If a manipulator can strategically position trades—placing aggressive purchases on that venue and aggressive sales elsewhere—they can bias the benchmark and therefore project influence over the market as a whole. As manipulation becomes increasingly synonymous with benchmark manipulation, it becomes clear why the recent push by regulators and courts to require fraud in manipulation cases is fundamentally misguided and how a better approach might be fashioned. Likewise, recent proposals to extensively regulate the creation of benchmarks are shown to misunderstand the mechanics of benchmark manipulation