“Red Flags” Of Market Manipulation And Effective Compliance Programs

Last week current and former supervisory personnel in the Enforcement Divisions of the Commodity Futures Trading Commission and Federal Energy Regulatory Commission spoke – at an Energy Bar luncheon – about (1) the “red flags” of possible manipulation and (2) effective compliance programs in this more aggressive federal enforcement environment.

These red flags do not necessarily mean that the trading is manipulative. But given that any determination of whether trading is manipulative is fact specific, if present these trades should be discussed with legal and compliance departments. The red flags they cited include:

  1. “Unprofitable trading”
  2. Trading to move price or protect a position that is flattering
  3. Taking advantage of flaws/glitches in the market rules
  4. You are the only entity doing this type of trade
  5. Trading in markets with little liquidity
  6. Trading inconsistent with market fundamentals
  7. Doing business off recorded lines or suggesting that conversations be off recorded lines

For more information, read our PDF: Red Flags

Further, they offered tips for effective compliance programs:

  1. Placing a compliance officer on the trading floor to interact with the traders
  2. Trading limits for trading group and for individuals
  3. Upper management must consider compliance work a profit center (rather than a drain on profits)
  4. Testing — prior to being in the middle of an investigation — document retention and document retrieval systems so the any investigation target does not end up providing information in “drips and drabs,” i.e., providing information to the agencies and then later finding additional information relevant to the investigation

For more information, read our PDF: Developing an Effective Compliance Program

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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