Manipulation and Gaming of Energy Markets

Vincent Kaminski

Price discovery – the process through which prices are determined and communicated to market participants – may be affected by occasional manipulation. Given the very vigorous measures taken by regulators in the US and the EU in the last few years, in our view the occurrences of manipulation have been infrequent (or the manipulators have learned new tricks). Still, the potential for manipulation exists, and traders and risk managers should be aware of this issue. A trader who engages in manipulation puts themselves and their firm in serious danger. A trader who is a victim of manipulation can incur significant losses, which are even more painful if their trade was based on solid market fundamentals and good research.

In this chapter, we will discuss some historical instances of market manipulation in the gas and electricity markets. What is interesting is that, in many cases, the manipulation in the gas markets was driven by a desire to influence electricity prices. For these, we have the benefit of ample documentation due to actions taken by the regulators. We shall also cover what seems to be an emerging pattern of manipulation in the energy markets: active trading in the

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