Marking the close (market manipulaton practice)
Marking the close involves deliberately buying or selling wholesale energy products at the close of the market in a manner that seeks to secure the closing price of the wholesale energy product at an artificial price.
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The European Agency of Energy Regulators (ACER) in its guidance refers to this practice as an example of the type of manipulation included in Article 2(2)(a)(ii) of REMIT.
ACER observes, this practice may take place on any individual trading day, but is particularly associated with dates such as future/option expiry dates or quarterly/annual portfolio or index reference/valuation points.
The U.K. energy market regulator Ofgem in the document of 8 September 2015 "Prohibition of market abuse under the Regulation on wholesale energy market integrity and transparency (EU) No 1227/2011 (REMIT)" expressed the view such behaviour undertaken to secure price assessments or index prices at an artificial price would also be an example of the type of manipulation set out in Article 2(2)(a)(ii) of REMIT.
Therefore, when trading around the close of markets or around price assessment periods, market participants should be particularly mindful of how their trading may affect the closing or assessed price.
Market participants should also be aware that entering into erroneous trades around these times could also constitute market manipulation even where such trades are later cancelled.
Once the trade is executed the price signal is shared with market participants, and is not necessarily removed by its cancellation.
Ofgem also emphasised that even if a closing or assessed price is not impacted by a market participant's trading, attempts to alter or influence these prices could still constitute attempted market manipulation and therefore breach Article 5 of REMIT.
According to the ACER (ACER REMIT Quarterly Issue No. 25 /Q2 2021) "marking the close in a context where orders are shown in an anonymous form can produce a severe misrepresentation of an exchange’s order book.
If market participants are unsure whether the order book reflects market fundamentals, they may lose confidence in the integrity and transparency of the market, and may even withdraw from it, hence creating a negative circle where market competition decreases and the reflectiveness of energy prices is eventually hampered".
Recent example of this behaviour comes from the Lithuanian natural gas market, where, according to the press release of the National Energy Regulatory Council of Lithuania (NERC) of 13 January 2020 market participant UAB Geros dujos engaged in market manipulation, i.e.:
- on the last day of each month the said market participant inserted orders at the energy exchange with the minimum allowed volume at prices significantly different from the prevailing market prices,
- the orders gave false and misleading signals about the level of wholesale prices resulting into transactions that affected a reference price assessed by the energy exchange,
- by securing the reference price at an artificial level, the market participant extracted undue profits through some of its retail customers' contracts which were indexed to the reference price.
This behaviour was assessed by the Lithuanian regulator as a breach of REMIT and was sanctioned with a penalty of EUR 28,583, which corresponded to 7.5% of the market participant's annual revenue (the decision subject to appeal). UAB Geros dujos authorisation to carry out natural gas supply activity in Lithuania was, moreover, terminated due to previous investigations from NERC.
ACER’s REMIT Quarterly 3/2019 describes, in turn, the Spanish NRA’s (CNMC's) fines imposed in November 2018 on two market participants for illegally marking the close on the gas markets (of EUR 120,000 to Multienergia Verde, S.L.U. (Multienergia) and EUR 80,000 to Galp Natural, S.A. (Galp))
The two Decisions specify that:
(i) Multienergia marked the close with artificial prices on several products and indexes of the Spanish wholesale gas market (MIBGAS - Mercado Ibérico del Gas) from 15 to 20 January 2017, and that
(ii) Galp marked the close with an artificial price on the day-ahead product in the same market on 17 January 2017.
As regards the Multienergia, the CNMC concluded that:
- the company, a traditional buyer of gas, executed over a period of six consecutive days several sales of gas at the closing of the market;
- these sales were of reduced volume (many times with the minimum volume size, i.e. 1 MWh/ day) and at prices very different (lower) from those of other transactions in the market;
- using this behaviour on the illiquid market, Multienergia managed to artificially fix 16 prices/benchmarks, including the intraday auction price, the last daily price (for intraday, D+2, and D+3), and the daily reference price (for D+2 and D+3);
- for example, Multienergia set the last daily price in the intraday market at EUR 26, EUR 30 and EUR 1, respectively, on three of the days when the over-the-counter prices for the same delivery were ranging between EUR 36 and EUR 40; Multienergia tried to fix the price of one wholesale energy product on 17 January 2017 and four additional prices/benchmarks on 20 January 2017 unsuccessfully.
Multienergia claimed its intention was not to trade in the wholesale energy products, but to give the market a certain price signal as retaliation for observed movements on the price that were caused by other market participants.
Therefore, CNMC concluded the market participant committed its behaviour intentionally, as it was aware of the anomalous nature of its orders aiming to decrease prices on the MIBGAS.
Multienergia has appealed the Decision to Audiencia Nacional.
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See also:
Market manipulation prohibition under REMIT
Wash trades as a REMIT market manipulation practice
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Regarding the behaviour of Galp, CNMC concluded that:
- this market participant, a typical net seller of gas in MIBGAS, executed two minimum volume transactions of gas (as a buyer) of the day-ahead product;
- these transactions were executed at the close of the market and at prices very different (higher) from those prevailing in previous transactions;
- transactions were executed at a price level 7% higher (i.e. 38.95 EUR/MWh) than the one at which the same market participant had sold natural gas just a few instances before in the same market; this price was also significantly higher than the prices prevailing on the over-the-counter market.
Therefore, CNMC concluded that the market participant fixed the last daily price at an artificial level and thus breached Article 5 of REMIT.
Galp has not appealed the Decision and has paid the fine.
Another case of marking the close investigation is described in the ACER REMIT Quarterly Issue No. 25 /Q2 2021.
As a result of an investigation opened in November 2018, the Spanish NRA (CNMC) published a decision on 23 April 2021, in which it imposed a fine of EUR 60,000 on Rock Trading World S.A. (Rock Trading) for a breach of Article 5 of REMIT.
In the decision, CNMC held that, during four days in November 2018, Rock Trading engaged in market manipulation on the Spanish wholesale gas market (Mercado Ibérico del Gas - ‘MIBGAS’).
CNMC found that Rock Trading engaged in two different behaviours during this period: besides marking the close also layering (on layering see the separate remarks here).
As regards marking the close, according to the CNMC, Rock Trading concluded the last transaction of the gas within-day session on 5 November 2018 on MIBGAS setting the closing price, just one second before the closure of the session (i.e. at 20:59:59 CET), at 23.45 EUR/MWh for 14 MWh/day. This closing price was determined to be artificial and Rock Trading’s behaviour was assessed by CNMC as uneconomical because:
i) the transaction price was 1.32 EUR/MWh lower than the daily reference price for the within-day product on MIBGAS for that trading session, 1.25 EUR/MWh lower than the weighted average price of the transactions of all other market participants in the same trading session, and 1.42 EUR/MWh lower than the weighted average price of all Rock Trading’s buy transactions for that trading session (behaviour contrary to economic logic); and
ii) for this transaction, Rock Trading acted as an aggressor to a buy order which had been visible for several hours (i.e. since 18:36 CET) and for which other market participants had shown no interest.
During the investigation, CNMC found that Rock Trading had concluded a bilateral OTC gas-selling contract, which explained Rock Trading’s net buying position in November 2018 on MIBGAS.
CNMC concluded that Rock Trading’s behaviour breached Article 5 of REMIT because the marking-the-close behaviour secured the price of the within-day natural gas product at an artificial level and therefore fell under the category of market manipulation defined in Article 2(2)(a)(ii) of REMIT.