The second chapter introduced the key conditions and data of the example used to illustrate the enforcement deficit in complex manipulation cases. Namely, the manipulation strategies observed at the energy exchange were examined from both an economic and a legal perspective. This interdisciplinary approach enabled a detailed analysis of the causes and effects of manipulative behavior.
In section B. it was shown which economic preconditions must be fulfilled for manipulative behavior to be profitable for firms. In a second step, the legal relevance of the strategies described, especially in the field of antitrust legislation, was pointed out. The two elements of the antitrust offense were examined in depth: Based on data from the European Com-mission sector inquiry dating back to 2007 and the more recent FCO sector inquiry from 2011, market dominance of the power market during the period of examination reaching from 2002 to 2009 could be proved for the four huge German energy suppliers. With regard to the abuse element of the offense, however, this work came to the conclusion that former inquiries did not succeed in providing sufficient evidence for actual manipula-tions that would have resulted in penalties.
In order to examine whether market participants have incentives to manipulate, section C. conducted an in-depth economic analysis of the German power market, using the tools of industrial organization and game theory. This incentive-based approach revealed that a competitive outcome with market prices equaling marginal cost of production did not constitute an equilibrium in the oligopolized German power market during the examination period. Instead, prices above the competitive level were likely. The Lave and Perekhodtsev model on withholding equilibrium was introduced to show the scope of price increases.
The incentives to manipulate may however be diminished or even be reduced to zero if market participants face a credible threat of punishments for infringements of the law.
Antitrust and capital market laws are hence crucial legal instruments to take deterrent effect against manipulations. Section D. of this chapter therefore surveyed previous ap-proaches chosen by European and German antitrust authorities to prosecute suspicious behavior and deliver convincing proof of manipulations. As a result, this work found none of the authorities’ efforts to have been successful in the prosecution of manipulations.
In the light of manipulations being attractive to market participants in the absence of effective regulatory deterrence (section C.), one must hence conclude that the energy market during the period of examination did provide huge incentives for infringements of the law. As the analysis, namely in section B. of this chapter, has shown, the regulatory
weaknesses do not originate from a lack of rules that interdict market manipulations. Both, antitrust and capital market laws contain a number of prohibitions that cover the manip-ulation strategies examined. However, there is a serious lack of enforcement due to the complex structure of the power industry and the exchange environment: For authorities, it is often not possible to distinguish between legal optimization of the power plant parc of an operator and illegal manipulation of the market. These insecurities led to an expected sanction for manipulators close to zero during the period of examination. There was hence almost no deterrent effect of the law that would have had any behavioral impact on market participants.
The following chapters will therefore discuss regulatory measures that are suited to elim-inate the shortcomings in enforcement in manipulation cases. Namely, a deterrence ap-proach that has a preventive behavioral effect on market participants will be introduced to close the enforcement gap.
THIRD CHAPTER:
IMPROVED PUBLIC MARKET SURVEILLANCE A. Introduction
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”693
Based on the findings from the preceding chapters, that revealed severe shortcomings in enforcement of infringements of antitrust and capital market manipulation bans, this sec-tion will focus on a positive analysis of the current sancsec-tioning system with regard to fines (section I) and the probability of punishment (section II). This analysis will reveal an in-sufficient level of deterrence that is not suited to fill the enforcement gap.
Subsequently, a normative analysis is conducted, aiming at the introduction of a system of public market surveillance that combines fines and the probability of fining in an optimal way to reach a preventive behavioral effect on market participants and success-fully deter market manipulations. The measures being discussed in this work are:
▪ A change of paradigm in the public market surveillance that turns from excessive fines to an increased probability of prosecution of infringements, combined with non-monetary sanctions for infringements of the law (this chapter).
▪ Tightened public surveillance might be accompanied by incentives for private ac-tors, e.g. the aggrieved parties or competiac-tors, to claim damages from the in-fringer (next chapter).
This chapter will examine the public market surveillance measures named for their suita-bility to solve the problem with regard to economic, legal and political criteria. It will be shown that there is a necessity for a coordination of capital market law and antitrust en-forcement on the one hand and public and private activities on the other hand. This results
693 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: Methuen & Co., Ltd., 1776).
in the claim for an integrated legal system of public and private enforcement intro-duced in the fifth chapter.
The following section B. begins with an introduction on the economic theory of optimal sanctions. Thereafter, the positive and normative analysis of the EU and German system are conducted for capital market law and antitrust enforcement.