FTC issues rule to fight oil manipulation

By Reuters Staff
August 6, 2009

NEW YORK, Aug 6 (Reuters) – The U.S. Federal Trade
Commission said on Thursday it would impose $1 million per day fines on energy traders engaged in price manipulation, a strong signal of the Obama administration’s desire to crack down on fraud in the oil markets.

The FTC said some of the violations it will seek to punish include false public announcements of planned pricing or petroleum output decisions, false statistical or data reporting, and so-called “wash sales” intended to disguise the liquidity in a market or pricing of a product.

Click here to see the FTC rule:

Following are selected quotes:

ANTHONY SABINO, PROFESSOR OF LAW AND BUSINESS. ST. JOHN’S
UNIVERSITY, NEW YORK:
“Frankly, this is a little ridiculous. There are already
substantial penalties under a variety of statutes, both federal
and state, for disseminating false information for profit. This
is mainly showboating by the FTC. Its energies would be better
spent on promulgating circuit breakers, such as were installed
on the stock exchanges after the 1987 Crash, to prevent wild
swings and/or greater enforcement of existing rules.”

AMERICAN PETROLEUM INSTITUTE
“We are concerned the new rule could lead to a less competitive
market that would ultimately not be in the best interest of
American consumers of gasoline, diesel and other petroleum
products. It could discourage companies from providing
information to the marketplace.
“Unlike other unfair or deceptive acts or practices, for
which the penalty per violation under the FTC Act is $11,000,
the maximum penalty here is nearly 100 times greater — $1
million — and it compounds each day until a violation is
rectified.
This clearly is an overreaction by the FTC when strong
deterrents already are in place.”

RACHEL ZIEMBA, LEAD ENERGY ANALYST AT RGE MONITOR, IN NEW YORK
“I think what we are seeing are the different regulators are
using the different tools that they have to try to curb the
greatest aspects of what they view as excess in the financial
markets.
I think what is going to be important is how coordinated
the different regulators’ responses are, both within in the
United States but also between the U.S. and the United Kingdom.
Should there be greater obstacles to trading in the U.S.
… we could see a move to other market. The risk to be avoided
is having a patchwork of responses.”

MICHAEL GREENBERGER, LAW PROFESSOR AT UNIVERSITY OF MARYLAND
AND FORMER DIRECTOR OF TRADING AND MARKETS AT CFTC:
“Some people will say markets are moored to supply and
demand fundamentals but it’s clear the Hill is suspicious of
wrongdoing.
I think oil prices will start going down and fundamentals
will have more influence on prices.
Legislation now gives the FTC the right to investigate all
these markets and see if traders are manipulating them. It
changes things because the FTC defines manipulation in the same
way that the SEC defines it in stock markets.
It allows for more investigation and it’s a much more
government-friendly definition of manipulation, a more consumer
friendly one too.
This could affect the way commodities index funds and banks
trading with proprietary funds can trade. FTC will be looking
for trade that is prearranged, trades that make it appear there
is market demand. These are called “wash trades” and they are a
classic per se violation.
Today, nobody can tell that these prearranged trades are
being done because they are mostly off the market. Some traders
get together and draw up a trade contract, but they agree on
their own prices rather than allowing fundamentals to determine
them. This type of trading unmoors the markets from
fundamentals, but has gone unchecked.”

TIM EVANS, ENERGY ANALYST, CITI FUTURES PERSPECTIVE, NEW YORK:
“As far as I can tell, the new FTC rule does not expand the
definition of activities that might constitute market
manipulation, but just raises the potential fines. Since most
criminals don’t expect to be caught, I’m not sure the higher
fines will necessarily constitute a major new deterrent.
Overall, this seems a relatively minor adjustment that I would
not expect to have any impact on trading activity or price
levels.”
DAN FLYNN, ANALYST AT PFGBest RESEARCH, CHICAGO:
“What makes one a violator is not clear. They’re way too vague.
They’re taking speculators out of the market. I see more U.S.
jobs lost because if they can’t do it here, what is to prevent
them from doing it somewhere else. We’re getting into over
regulation.”

QUOTES FROM U.S. CASH PRODUCTS TRADERS WHO ASKED NOT TO BE
IDENTIFIED:
**”It really depends on what resources the various agencies
throw at (the effort). Most of them are hugely understaffed and
don’t really have the caliber of people to do the job. They
need to hire more people from our business.”

**”I’m all for getting rid of any market manipulation, if there
is any. How the regulations are going to achieve it, I’m not
sure.”

**”Well, I have not seen the full details but to be honest one
would have thought they should have been doing this sort of
policing already. Like all of these agencies, none of them
appears to be doing what is expected of them.”

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