Jan 31, 2014
CPI Cartel Column edited by Rosa Abrantes-Metz (Global Economics Group/NYU Stern School of Business)
Welcome to the January issue of “From Collusion to Competition,” and happy New Year!
Our first 2014 column is dedicated to a recent success of the application of screens to foreign exchange (FX) markets by Bloomberg News investigative reporters Liam Vaughan and Gavin Finch, who have been at the forefront of writing about market manipulation in FX and other markets such as gold and silver. They are part of Bloomberg’s newly formed Financial Crime team and can be followed on @bloombergliam and @GavinFinchBBG.
As many of you may know, I am a big fan of screens for conspiracies and manipulations. For those of you who are less familiar with these tools, what are screens?
The ability to flag unlawful behavior through economic and statistical analyses is commonly known as screening. A screen is a statistical test based on an econometric model and a theory of the alleged illegal behavior, designed to identify whether collusion, manipulation or any other type of cheating may exist in a particular market, who may be involved, and how long it may have lasted. Screens use commonly available data such as prices, bids, quotes, spreads, market shares, volumes, and other data to identify patterns that are anomalous or highly improbable.
Over the last few years, and starting with the flagging of potential illegal behavior on LIBOR in 2008 by then Wall Street Journal investigative reporters Carrick Mollenkamp and Mark Whitehouse, followed by my work with co-authors Albert Metz, Michael Kraten and Gim Seow (read here), screens have been in the forefront of the massive amount of investigations undertaken worldwide on alleged illegal behavior in financial benchmarks setting. LIBOR screening flagged illegal behavior leading to investigations and subsequent leniency applications and settlements, as well as to investigations in a variety of other benchmarks and markets.
Most recently, excellent applications of screening by reporters Liam Vaughan and Gavin Finch assisted in the triggering of the worldwide investigations on FX, a market of more than 5 trillion dollars a day. In their first article on this topic from last June, Liam and Gavin first reported the possibility that traders at some of the world’s biggest banks rigged benchmark WM/Reuters rates, according to current and former dealers with knowledge of the practice. They then followed with an August 2013 article in which they first screened for possible manipulation and collusion affecting a selected group of exchange rates. They identify abnormal spikes in these rates around 4pm London time WM/Reuters fixing. Just last week on January 27, 2014, Liam and Gavin followed up with another screening of this market, in which they show that after news came out that regulatory bodies and competition authorities were investigating the FX market, the frequency and magnitude of these abnormal rates spikes around the 4pm fixing were reduced, evidence which is consistent with a possible break of a cartel.
Reporters, academics and consultants have repeatedly proven the power of screens to flag possible illegal behavior. Some regulators such as the U.S. Securities and Exchange Commission have also recognized the value of these methods and have recently implemented screening models for accounting and trading fraud, which have already led to the launch of several investigations. Other competition authorities such as the CADE in Brazil and the Mexican Competition Authority, among others, have also very successfully used screens. But some authorities have been less willing to do so. Ironically though, they are now being kept extremely busy and stretched in resources in investigations first flagged by the screens they themselves have disregarded and sometimes claimed as useless.
In my view, the growth in the development and adoption of screens around the world can only increase further. Competition authorities need to realize that a more proactive, rather than reactive, anti-cartel policy needs to be in place, and that screens have an important role to play. Arguments against the adoption of screening, such as “they are too resource intensive,” or “we tried it 40 years ago and it did not work,” have been made but, in my view, lack support. My October 2013 submission to the OECD on the value of screens contains a detailed explanation on why these need to be used, and also puts forward counterarguments to the most common arguments against screens.
I hope you enjoy this issue, and feel free to contact me at RAbrantes-Metz@globaleconomicsgroup.com with any comments or suggestions.
Our February issue will be dedicated to Peru. Until then!
Rosa M. Abrantes-Metz