Manipulating Markets

The Guardian has published a pair of articles (first and second) about charges that large energy companies manipulated energy prices. The charges appear to center on "attempts to distort the prices reported by the company" which "are critically important because many wholesale gas contracts are based on them and small changes in the price can cost or save companies millions" (first). I left with several thoughts.

The second article quotes a third article to point out the importance of incentives. "[T]he entire system is'dependent on consenting adults and traders not talking up their book but that is inevitably what happens.'"

Second, having prices tied automatically to a "reported" average creates opportunity for mischief, especially if the average includes only a subset of all trades. 

Third, the initial charge was that traders had artificially depressed prices. Whether you gain from a price increase or a price decrease depends on which side to the market you stand. 

Forth, the divergence of interests is why buyers rarely collude with sellers. The first article seems to miss this point when it states, "the vast majority of the stuff we use to heat our homes and run our businesses is sold "over the counter" between two parties, who can, if they wish, conspire to make mischief." I can see how someone holding a book to buy oil at reported average can benefit by agreeing to sell some oil at sub-competitive prices if the contract reduces the reported average; but, this is hardly a conspiracy between the buyer and the seller.