11/13/2012 01:02 pm ET

Manipulating Markets Is Easy: British Gas Price Edition

And now it's time for another installment in our continuing series, Manipulating Markets Is Easy. What have traders gone and manipulated this time? The British natural-gas market, apparently.

The Financial Services Authority, the top financial regulator in the U.K., is looking into charges that traders, maybe working on behalf of power providers in the U.K., have been jerking around market prices for natural gas for one reason or another, maybe to profit on derivatives contracts or maybe just to buy natural gas more cheaply, the Guardian reports.

"Traders have made clear to me that manipulation of gas prices is taking place on a regular basis," former trader Seth Freedman told the Guardian. "They name big companies among those they accuse of trying to rig prices and reap profits. Market participants claim the fixing of prices is an open secret."

This particular scandal, you'll not be very shocked to learn, is similar to the still-unfolding Libor rigging scandal. In the Libor case, traders for years manipulated a crucial interest-rate benchmark, the London Interbank Offered Rate (aka "Libor"), by lying about their own borrowing costs. In this case, traders are apparently lying about prices they're paying for natural gas, while also pushing bogus trades through the obscure, thinly traded market.

The manipulation was reported to the FSA by a British firm, ICIS Heren, that knits together benchmark natural-gas prices by watching market trades and talking to traders. Such firms are under their own regulatory microscope, the Wall Street Journal points out, amid concerns that the whole self-regulated market is rotten to the core. Freedman told the Guardian that many price-reporting firms had "poorly trained staff" who were "overly cozy" with traders. But in this case it seems ICIS Heren did the right thing, and it hasn't been accused of any wrongdoing.

Also not yet accused of any wrongdoing are the "big six" energy firms that supply power to the U.K.: British Gas, EDF, E.On, Npower, ScottishPower and SSE. But they are the prime suspects in the manipulation, according to the Guardian. The companies, most of them foreign-owned, are already deeply unpopular in the U.K. for allegedly jacking up energy prices in shady ways.

All six today denied any involvement in manipulating the gas market, which they pointed out involves many more players than just the six of them.

And that's where this story starts to get complicated: It may well be the case that the natural-gas market is just manipulated all of the time by everybody who has an interest in manipulating it. If the Libor market, and other major interest-rate markets, can be easily manipulated by a small group of players in a relatively transparent process, then it shouldn't be that hard to jerk around this murkier market. It may need a total overhaul, which could take a while.

At the same time, some might wonder just whom gas-market manipulation has really hurt. After all, in the instances cited in the Guardian story, prices were manipulated lower. If the energy providers passed those savings on to consumers, then everybody won. In that sense, the gas-manipulation scandal echoes the Libor scandal in another way: If interest rates and gas prices are manipulated lower, then why is that a bad thing?

The problem is that traders will eventually have an incentive to manipulate gas prices, and interest rates, higher, to help out some derivative trade or other. And if you can't believe in the legitimacy of the gas-price market, or the market for Libor, or the market for benchmark interest rates all over the world, then our collective faith in financial markets erodes just a little more.


Libor Scandal Timeline