Market manipulation under REMIT

 


 

 

Market manipulation definition

 

 

REMIT prohibits engaging in, as well as attempting to engage in, market manipulation on wholesale energy markets. 

 

REMIT framework excludes from its scope market manipulation in electricity and gas derivatives, where Market Abuse Regulation (MAR) is applicable.

 

Definition of market manipulation laid down in Article 2 of REMIT.

 

The offences are defined as entering into transactions which give or have the intention of giving false or misleading signals as to the supply, demand or price of a product, or which secure or have the intention of securing prices at artificial levels; as well as disseminating false or misleading information through the media. 

 

 

Definition of Market Manipulation and Attempt to Manipulate the Market under REMIT


Art. 2(2) of REMIT:

 

- false or misleading orders/transactions 

 

- price positioning

 

- fictitious device or deception

 

- dissemination of false or misleading information

 

Art. 2(3)of REMIT - the 'intention' element crucial for defining the attempt.

 

It is a defence to prove that a trade was entered for legitimate reasons and that it conformed to accepted market practices on the wholesale energy market concerned.

 

ACER has provided examples of the types of practices which could constitute market manipulation and are considered particularly relevant for wholesale energy markets, based on the examples of market abuse practices produced by CESR (the Committee of European Securities Regulators) for the Market Abuse Directive.

 

The examples include wash trades; placing orders with no intention of executing them; cross-market manipulation; and pre-arranged trading.

 

It is visible that rather an example based approach has been adopted in that regard which create space for uncertainty and divergent interpretations.

 

UK Ofgem document of 8 September 2015 "Prohibition of market abuse under the Regulation on wholesale energy market integrity and transparency (EU) No 1227/2011 (REMIT" underlines some key features of REMIT market manipulation regime:

 

- market manipulation may occur without an impact on supply, demand or price;

 

- there is no need for there to have been intent for market manipulation, as defined in Article 2(2)(a), to be found.

 

It needs to be, hence, taken into account that certain orders or transactions, depending on the specificities of the market and on the circumstances, may be considered as market manipulation, or attempt thereof under Article 2(2) and 2(3) of REMIT, and prohibited by Article 5 of REMIT, irrespective the motive behind the orders/transactions, or regardless of the actual effect on the market.

 

The necessary due care should be taken on the part of market participants to ensure that erroneous trading does not accidently result in outcomes that could constitute a breach of REMIT.

 

 

False/misleading transactions - trading, or placing orders to trade, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products (Article 2(2)(a)(i) and (3)(a)(i) of REMIT).

 

Price positioning - trading, or placing orders to trade, which secures or attempts to secure, by a person, or persons acting in collaboration, the price of one or several wholesale energy products at an artificial level, unless the person who entered into the transaction or issued the order to trade establishes that his reasons for doing so are legitimate and that that transaction or order to trade conforms to accepted market practices on the wholesale energy market concerned (Article 2(2)(a)(ii) and (3)(a)(ii) of REMIT).

 

Transactions involving fictitious devices or any other form of deception – trading, or placing orders to trade, which employs fictitious devices or any other form of deception or contrivance (Article 2(2)(a)(iii) and (3)(a)(iii) of REMIT).

 

Dissemination of false and misleading information – giving out information that conveys a false or misleading impression about a wholesale energy product where the person doing this knows or ought to have known the information to be false or misleading (Article 2(2)(b) and (3)(b) of REMIT).

 

Layering

 

The above Ofgem document particularly highlights layering as a practice, which amounts to market manipulation in the energy market.

 

As the layering is described the act of entering a series of bids (or offers), which you do not intend to execute, at increasing (or, for offers, decreasing) prices.

 

This is likely to amount to a breach of REMIT (by analogy with the regulation of financial services, Canada Inc (formerly trading as Swift Trade Inc) v Financial Services Authority [2013] All ER (D) 266 (Feb)).

 

This is because:

 

- the placement of bids (or offers) which are not intended to be traded provides a false signal as to the level of demand (supply) to the market (Article 2(2)(a)(i)); and/or

 

- the false signal may secure, or attempt to secure, the price at an artificial level (see Article 2(2)(a)(ii)).

 

The price at which a wholesale energy product is secured is considered an artificial level if it reflects a false signal as to the demand for (or supply of) that product rather than prevailing market conditions.

 

Marking the close

 

Another example of market manipulation Ofgem especially accentuates is marking the close.

 

The European Agency for the Cooperation 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.

 

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.

 

In the Ofgem's 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).

 

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 emphasises 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.

 

Pre-arranged trading


Ofgem underlines that trading which takes place on an anonymous exchange but which has been the subject of a prior arrangement as to price and / or volume is likely to amount to market manipulation and a breach of REMIT as a form of pre-arranged trading.

 

Under Article 2(2)(a)(i) of REMIT, entering into a transaction, or issuing any order to trade in wholesale energy products which gives or is likely to give false or misleading signals as to the supply of, demand for, or price of wholesale energy products is a form of market manipulation.

 

Pre-arranged trading is likely to give a false or misleading signal and as such could represent a breach of REMIT because it indicates to the market availability of supply and/or a price which is not actually available to the whole market on equal terms.


Ofgem points out that an existing order can become a pre-arranged trade if the price and/or volume are amended after prior agreement between two or more parties. It is not necessary for this activity to move prices for market manipulation to occur.

  

 

Practical examples

 

 

Although there are not many examples of regulatory practice on the REMIT's application so far, ACER's annual report on its activities under REMIT in 2012 mentions  four cases related to potential breach of the prohibition of market manipulation according to Article 5 of REMIT.

 

Three cases were brought to the Agency's attention through notifications of national regulatory authorities (NRAs) or persons professionally arranging transactions in accordance with Articles 15 and 16 of REMIT respectively, while one case was initiated by the Agency after analysing information in the media.

 

The Agency's activities consisted of coordination of the concerned NRAs. One of the cases had potential cross-border impact and therefore required the establishment and coordination of an investigatory group consisting of all concerned NRAs.

 

As ACER reports, following the review, three of the cases were closed by the competent NRAs without a breach of REMIT being found. One case is still ongoing and was notified to ESMA and the competent financial market authority.

 

It is expected that the number of cases under review will grow in the following years, in particular following the start of systematic data collection on the basis of the implementing acts.

 

 

Recitals (13) and (14) of REMIT

 

"(13) Manipulation on wholesale energy markets involves actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand, including actual availability of production, storage or transportation capacity, and demand. Forms of market manipulation include placing and withdrawal of false orders; spreading of false or misleading information or rumours through the media, including the internet, or by any other means; deliberately providing false information to undertakings which provide price assessments or market reports with the effect of misleading market participants acting on the basis of those price assessments or market reports; and deliberately making it appear that the availability of elec­ tricity generation capacity or natural gas availability, or the availability of transmission capacity is other than the capacity which is actually technically available where such information affects or is likely to affect the price of wholesale energy products. Manipulation and its effects may occur across borders, between electricity and gas markets and across financial and commodity markets, including the emission allowances markets.


(14) Examples of market manipulation and attempts to manipulate the market include conduct by a person, or persons acting in collaboration, to secure a decisive position over the supply of, or demand for, a wholesale energy product which has, or could have, the effect of fixing, directly or indirectly, prices or creating other unfair trading conditions; and the offering, buying or selling of wholesale energy products with the purpose, intention or effect of misleading market participants acting on the basis of reference prices. However, accepted market practices such as those applying in the financial services area, which are currently defined by Article 1(5) of Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) (3) and which may be adapted if that Directive is amended, could be a legitimate way for market participants to secure a favourable price for a wholesale energy product."

 

An example described in the above report in greater detail was as follows.

 

In view of the development of electricity prices in the Member State concerned in early 2012 and press reports claiming that speculation of electricity traders nearly caused a blackout and significant price peaks, the Agency contacted the relevant NRA and requested background information to be able to assess a potential breach of the provisions in REMIT.

 

According to the information received, the NRA assessed the case as potentially breaching national security of supply provisions. However, no breach of the provisions in REMIT was detected. The Agency therefore closed the case.

 

ACER's annual report on its activities under REMIT in 2014 (p. 47) describes more examples of potential market manipulation in the wholesale electricity market brought to the attention of energy regulatory authorities.

 

Among them is the case where the Agency and the relevant NRA were notified by an energy exchange on a case potentially involving price manipulation of several wholesale energy products.

 

Identical orders were introduced and withdrawn several times during the day in related products. After evaluating the cross market movements and the fundamental data available, a combination of actions in different markets for the same period could not be proved.

 

Also fundamental information justified some of the withdrawn bids.

 

In particular, a failure in one power station produced chain effects in other power stations owned by different market participants, explaining the amount of bids withdrawn being higher than expected.

 

Another potential market manipulation related to the wholesale gas market: a market participant placed an unusual number of orders for an illiquid month-ahead product.

 

In several instances the company acted on both sides (placing bids and asks), which were removed from the market before being executed. Most of the orders were placed during the market closing period and were only upheld during a few minutes.

 

The behaviour created the impression that the market participant was not interested in executing the orders and only intended to affect the closing price of the month-ahead product.

 

The market participant was requested to provide further information on the behaviour and was interviewed by the relevant NRA.

 

The case was closed with a warning from the NRA to the involved market participant, but no sanction was applied as this time the NRA had no sanctioning powers. The market participant committed to change the behaviour in the market.

 

 

Organised market's rules

 

 

It is useful to take account of certain organised market rulebooks, like for instance Nord Pool Spot which require each member to ensure that any orders issued by it reflect a genuine purchase or sales interest, and that all transactions to which a member is a party are genuine.

 

Such requirements go further than REMIT provisions. 

 

Pursuant to the Nord Pool Spot clarifications, they partly overlap with the REMIT prohibition of market manipulation, but are wider in the sense that orders and transactions that do not send a false or misleading signal or do not secure prices at an artificial level may still be a breach of this requirement.

 

Nord Pool Spot communication further explains that the background for this requirement is that it is important that members trading on the physical markets have sufficient routines to ensure the quality of their orders.

 

 

 

Article 2(2) REMIT

 

'market manipulation' means:

 

(a) entering into any transaction or issuing any order to trade in wholesale energy products which: (i) gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products;
(ii) secures or attempts to secure, by a person, or persons acting in collaboration, the price of one or several wholesale energy products at an artificial level, unless the person who entered into the transaction or issued the order to trade establishes that his reasons for doing so are legitimate and that that transaction or order to trade conforms to accepted market practices on the wholesale energy market concerned; or
(iii) employs or attempts to employ a fictitious device or any other form of deception or contrivance which gives, or is likely to give, false or misleading signals regarding the supply of, demand for, or price of wholesale energy products;

 

or

 

(b) disseminating information through the media, including the internet, or by any other means, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products, including the dissemination of rumours and false or misleading news, where the disseminating person knew, or ought to have known, that the information was false or misleading.

When information is disseminated for the purposes of journalism or artistic expression, such dissemination of information shall be assessed taking into account the rules governing the freedom of the press and freedom of expression in other media, unless:

(i) those persons derive, directly or indirectly, an advantage or profits from the dissemination of the information in question; or
(ii) the disclosure or dissemination is made with the intention of misleading the market as to the supply of, demand for, or price of wholesale energy products.

 

 

 

 

Article 2(3) REMIT

 

'attempt to manipulate the market' means:

 

(a) entering into any transaction, issuing any order to trade or taking any other action relating to a wholesale energy product with the intention of:
(i) giving false or misleading signals as to the supply of, demand for, or price of wholesale energy products;
(ii) securing the price of one or several wholesale energy products at an artificial level, unless the person who entered into the transaction or issued the order to trade establishes that his reasons for doing so are legitimate and that that transaction or order to trade conforms to accepted market practices on the wholesale energy market concerned; or
(iii) employing a fictitious device or any other form of deception or contrivance which gives, or is likely to give, false or misleading signals regarding the supply of, demand for, or price of wholesale energy products;

 

or

 

(b) disseminating information through the media, including the internet, or by any other means with the intention of giving false or misleading signals as to the supply of, demand for, or price of wholesale energy products.

 

  

 

 

 

 

 

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    Documentation    

 

 

 

 

 

REMIT, Article 2(2) and (3), Article 5, Recitals 13 and 14

 

ACER's annual report on its activities under REMIT in 2014

 

ACER's annual report on its activities under REMIT in 2012

 

UK Ofgem document of 8 September 2015 Prohibition of market abuse under the Regulation on wholesale energy market integrity and transparency (EU) No 1227/2011 (REMIT)

 

Ofgem letter of 12 December 2016, Scarcity pricing and conduct in the wholesale energy market

 

 

 

 

 

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Attachment: 

 

GUIDANCE NOTE 1/2017 ON THE APPLICATION OF ARTICLE 5 OF REMIT ON THE PROHIBITION OF MARKET MANIPULATION, WASH TRADES 1st Edition, 19-June-2017

 

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Last Updated on Wednesday, 12 July 2017 23:26
 

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