The Bank of Nova Scotia has recently come to an agreement with the U.S. Department of Justice and the Commodity Future Trading Commissions after the bank was found guilty of metals market manipulation. Market manipulation refers to the act of artificially inflating or deflating the price of a security or commodity in order to influence the market value of these commodities for personal gain. In this case, investigators found that on thousands of occasions from January of 2008 and July of 2016, buy-and-sell orders for precious metals were placed by Scotiabank traders only for these orders to be later cancelled.
This activity is referred to as “spoofing” which is the act of using an algorithm that rapidly displays and cancels large orders right before it is consummated. This is done with the intent to manipulate the prices of the commodity by creating a false perception of the supply and demand of a particular commodity.
This Was Not the First Offense
The $127.5M fine was imposed two years after Scotiabank was sanctioned for the same offense (metals spoofing) where it was fined for the amount of $800,000 for spoofing operations conducted between June 2013 to July 2016. The aggravating circumstance that led to such a hefty fine was the fact that Scotiabank was found to have made several false statements when asked about these activities.
Other Fraudulent Market Activities
Besides market manipulation, authorities are also on the watch for activities such as hoarding and price gouging.
Hoarding refers to the act of purchasing unreasonably large quantities of a product or commodity with the intention of profiting from a future price increase. Unlike in market manipulation, where the fraudulent activity lies in creating a false perception of market conditions, hoarding actually directly affects the supply and demand for a commodity. By depriving others of the supply of an essential good, the price of that same good is bound to increase, at which point, the hoarder sells the hoarded products at a significant profit.
Price gouging refers to the act of fixing a price for a certain commodity without allowing its price to be first determined by supply and demand. A common example of this is when a seller, knowing that there is a high demand for a certain product, chooses to sell that product much higher than the manufacturer’s suggested price. This is illegal and immoral because this restricts a commodity that should be widely available to the masses.
What Does This Mean for Market Participants?
More than anything, this means that it’s increasingly important to exercise due vigilance when investing in securities. This is especially true during an economic crisis when the value of goods and commodities are bound to become much more volatile. This increase in volatility makes it difficult to determine whether the increase or decrease in value of a certain stock is reflective of actual market conditions or if it is merely through the manipulation of the markets.
The only sure way to know is to hire a forensic economist to accurately determine the condition of the market and the commodities in it. Forensic economists may also function as an economic expert witness for cases such as the one mentioned above.