Recent Successes of Screens for Conspiracies and Manipulations: Why Are There Still Skeptics?

This article is part of a Chronicle. See more from this Chronicle

Rosa Abrantes-Metz, Oct 29, 2014

A veritable “who’s who” of high profile financial benchmarks has been under investigation for years now, and likely for years to come. The first was USD LIBOR. In 2008 two Wall Street Journal articles reported possible manipulation intended to artificially depress the LIBOR rate based on an empirical screen. These reports were quickly followed by my own research presenting evidence of possible collusion among many of the participating banks well before the financial crisis. Investigations then extended to other “Ibors” including Euribor, Yen LIBOR, and TIBOR. To date banks have already been fined more than $6 billion, and more is expected.

After the “Ibors” came foreign exchange, when in mid-2013 Bloomberg presented evidence of a possible manipulation based on screening of price movements. My own work on FX was contained in a December 2013 complaint filed in New York, which extended Bloomberg’s analysis and showed further evidence of highly anomalous price spikes at key times of the day when certain benchmarks are set.

The London Gold Fixing was next. In December 2013 I wrote an Op-Ed arguing that the large price declines I observed around the time of the London pm and Silver fixings—when the “price of gold and silver” for the day are determined for the purposes of many derivative contracts—were consistent with collusion to manipulate these benchmarks. A Bloomberg article followed in February 2014 outlining additional results from my research on gold. Since then approximately 30 lawsuits have been filed in the United States alone. Last May the U.K.’s Financial Conduct Authority fined Barclays for gold manipulation.

In 2013 Bloomberg reported that the U.S. Commodity Futures Trading Commission had found evidence of manipulation of ISDAfix, a key benchmark referenced in a number of swaps. My empirical collusion analysis on USD ISDAfix, contained in the complaint filed in September by the Alaska Electrical Pension Fund, shows that once again banks most likely colluded to move this benchmark to the benefit of their derivative positions. Four days after this complaint was filed, Bloomberg revealed that the CFTC is reported to have found evidence of criminal (collusive) behavior on USD ISDAfix submissions.

There can be little doubt that major banks are colluding to manipulate many financial benchmarks. I have argued for years that these benchmarks are easy targets for abuse. It is often easy for a handful of banks to move these numbers; even a miniscule movement can give rise to millions in illegal (and risk-free) profits, and virtually nobody is watching. There should also be little doubt that monitoring the data through empirical screens is powerful and effective in identifying this behavior, and authorities around the world need to take the lead on regularly screening the markets to detect and deter manipulation and collusion.

Despite the successes of cartel detection over the last 20 years, even prior to the cartels uncovered since LIBOR, there are many as myself who believe that competition authorities have just started to scratch the surface, and that proactive detection and deterrence policies need to be established and lead by the use of empirical screens.

This article will directly discuss the value added of screens over leniency programs as well as the main concerns raised on the use of screens.