Market Manipulation Should Be a Crime

Fines aren’t a sufficient deterrent to rigging the financial system
London Stock Exchange Photograph by Alastair Grant/AP Photo

Amid a spate of scandals over the rigging of financial benchmarks for commodities, currencies, interest rates, and other things, the British government is making a bold move to restore confidence: By the end of this year, it plans to make manipulation a criminal offense in all the affected markets.

The U.K.’s plan—aimed at maintaining London’s role as a major financial center—raises some questions. Can’t investors look out for themselves? Shouldn’t tweaking the way markets are designed, combined with the risk of damaged reputations, suffice to keep traders in line? No and no.

“Buyer beware” doesn’t apply on this scale. These markets aren’t casinos, where people can choose whether to play. Trade in money and commodities is central to the functioning of the global economy. These markets set prices for everything from gasoline to mortgages. If insiders manipulate them for personal gain, they do so at the expense of millions of consumers.

Reputation, by itself, isn’t enough of an incentive to keep a trader honest. The profits from manipulation—and the bonuses they generate—can be huge, and traders and executives change jobs too often for the good name of an institution to carry much weight. Many of the world’s largest banks have lied about their borrowing costs for years.

Regulators are rightly taking steps to make benchmarks less vulnerable to interference, in part by requiring them to be based on observable transactions (rather than relying on traders to tell the truth) and administered by independent parties (rather than by the same banks that set the prices). Good market design will help, but it’s no panacea. Reporting by Bloomberg News suggests traders managed to rig currency benchmarks that already met regulators’ guidelines.

Stronger deterrents are needed. Fines alone fall short: The billions of dollars that banks pay mostly punish shareholders, whose control over corporate culture and behavior is limited even when they choose to exert it. The threat of criminal penalties will be much more potent.

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    To read A. Gary Shilling on a stock market swoon and Cass R. Sunstein on why people brag, go to: Bloomberg.com/view.

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