Market manipulation prohibition under REMIT
- Category: Market manipulation under REMIT
REMIT Regulation prohibits engaging in, as well as attempting to engage in, market manipulation on wholesale energy markets.
REMIT framework excludes from its scope market manipulation in electricity and gas derivatives, where Market Abuse Regulation (MAR) is applicable.
10 May 2022
CoRDiS found that in October 2016, in a context of high electricity prices and stressed markets (due to the unavailability of several EDF nuclear reactors), EDF failed to publicly disclose inside information in an effective and timely manner. The information related to the request from the French Nuclear Safety Agency for additional controls over five nuclear reactors, which would lead to their temporary unavailability.
Furthermore, EDF used this inside information to acquire two related wholesale energy products via its trading subsidiary EDFT, thus breaching the prohibition of insider trading.
CoRDiS further assessed an operational mistake that EDFT had acknowledged, which led to excessive purchases on the French day-ahead electricity market and contributed to the price spikes observed on 7 and 8 November 2016. CoRDiS concluded that EDFT’s erroneous orders likely gave false or misleading signals as to the supply and demand on the spot electricity market.
Definition of market manipulation is laid down in Article 2 of REMIT.
The offences are defined as entering into transactions which give or have the intention of giving false or misleading signals as to the supply, demand or price of a product, or which secure or have the intention of securing prices at artificial levels; as well as disseminating false or misleading information through the media.
Importantly, for the attempted market manipulation, it is not necessary that it gives (is likely to give) false or misleading signals or places (attempts to secure) the price at an artificial level.
The mere intention of a market participant to give these signals or position the price artificially is sufficient for attempted market manipulation.
The French Conseil d’Etat in the decision of 18 June 2021 (regarding the CRE sanction committee’s 2018 decision against the company Vitol S.A.) confirmed that the mere likelihood of a transaction or order giving false or misleading signals to the market is enough to qualify a behaviour as market manipulation.
It is not necessary to demonstrate that such signals were actually given, or that there was manipulative intent (REMIT Quarterly Issue No. 25 /Q2 2021).
It is a defence to prove that a trade was entered for legitimate reasons and that it conformed to accepted market practices on the wholesale energy market concerned.
European Agency for the Cooperation of Energy Regulators (ACER) has provided examples of the types of practices which could constitute market manipulation and are considered particularly relevant for wholesale energy markets, based on the examples of market abuse practices produced by CESR (the Committee of European Securities Regulators) for the Market Abuse Directive.
The examples include wash trades, placing orders with no intention of executing them, cross-market manipulation, transmission capacity hoarding and pre-arranged trading.
Definition of market manipulation and attempt to manipulate the market under REMIT
Art. 2(2) of REMIT:
- false or misleading orders/transactions
- price positioning
- fictitious device or deception
- dissemination of false or misleading information
Art. 2(3) of REMIT - the 'intention' element crucial for defining the attempt
It is visible that rather an example-based approach has been adopted in this regard - creating thereby space for uncertainty and divergent interpretations.
UK Ofgem document of 8 September 2015 "Prohibition of market abuse under the Regulation on wholesale energy market integrity and transparency (EU) No 1227/2011 (REMIT)" underlined some key features of REMIT market manipulation regime:
- market manipulation may occur without an impact on supply, demand or price;
- there is no need for there to have been intent for market manipulation, as defined in Article 2(2)(a), to be found.
Hence, it needs to be taken into account that certain orders or transactions, depending on the specificities of the market and on the circumstances, may be considered as market manipulation, or attempt thereof under Article 2(2) and 2(3) of REMIT, and prohibited by Article 5 of REMIT, irrespective the motive behind the orders/transactions, or regardless of the actual effect on the market.
The necessary due care should be taken on the part of market participants to ensure that erroneous trading does not accidently result in outcomes that could constitute a breach of REMIT. Examples of erroneous behaviours which were sanctioned by energy market regulators are French CoRDiS case of May 2022 relating to EDF trading subsidiary EDFT operational mistakes in October 2016 and British Ofgem case of July 2017 relating to National Grid Electricity Transmission plc’s erroneously caused incorrect de-rated capacity margin (DRM) calculations to be published through Elexon’s online platform between November 2015 and January 2016.
False/misleading transactions - trading, or placing orders to trade, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products (Article 2(2)(a)(i) and (3)(a)(i) of REMIT).
Price positioning - trading, or placing orders to trade, which secures or attempts to secure, by a person, or persons acting in collaboration, the price of one or several wholesale energy products at an artificial level, unless the person who entered into the transaction or issued the order to trade establishes that his reasons for doing so are legitimate and that that transaction or order to trade conforms to accepted market practices on the wholesale energy market concerned (Article 2(2)(a)(ii) and (3)(a)(ii) of REMIT).
Transactions involving fictitious devices or any other form of deception – trading, or placing orders to trade, which employs fictitious devices or any other form of deception or contrivance (Article 2(2)(a)(iii) and (3)(a)(iii) of REMIT).
Dissemination of false and misleading information – giving out information that conveys a false or misleading impression about a wholesale energy product where the person doing this knows or ought to have known the information to be false or misleading (Article 2(2)(b) and (3)(b) of REMIT).
The above Ofgem document particularly highlights layering as a practice, which amounts to market manipulation in the energy market.
As the layering is described the act of entering a series of bids (or offers), which the market participant does not intend to execute, at increasing (or, for offers, decreasing) prices.
This is likely to amount to a breach of REMIT (by analogy with the regulation of financial services, Canada Inc (formerly trading as Swift Trade Inc) v Financial Services Authority  All ER (D) 266 (Feb)).
This is because:
- the placement of bids (or offers) which are not intended to be traded provides a false signal as to the level of demand (supply) to the market (Article 2(2)(a)(i)); and/or
- the false signal may secure, or attempt to secure, the price at an artificial level (see Article 2(2)(a)(ii)).
The price at which a wholesale energy product is secured is considered an artificial level if it reflects a false signal as to the demand for (or supply of) that product rather than prevailing market conditions.
The European Agency ACER has published on 22 March 2019 an extensive guidance on spoofing as a manipulation practice (Guidance Note 1/2019 on the application of Article 5 of REMIT on the prohibition of market manipulation, layering and spoofing in continuous wholesale energy markets, 1st Edition).
Read more on layering (spoofing)
Marking the close
Another example of market manipulation included in Article 2(2)(a)(ii) of REMIT is marking the close, i.e. deliberately buying or selling wholesale energy products at the close of the market in a manner that seeks to secure the closing price of the wholesale energy product at an artificial price.
Read more on marking the close
Ofgem underlines that trading which takes place on an anonymous exchange but which has been the subject of a prior arrangement as to price and / or volume is likely to amount to market manipulation and a breach of REMIT as a form of pre-arranged trading.
Under Article 2(2)(a)(i) of REMIT, entering into a transaction, or issuing any order to trade in wholesale energy products which gives or is likely to give false or misleading signals as to the supply of, demand for, or price of wholesale energy products is a form of market manipulation.
Pre-arranged trading is likely to give a false or misleading signal and as such could represent a breach of REMIT because it indicates to the market availability of supply and/or a price which is not actually available to the whole market on equal terms.
Ofgem points out that an existing order can become a pre-arranged trade if the price and/or volume are amended after prior agreement between two or more parties. It is not necessary for this activity to move prices for market manipulation to occur.
The term wash trade refers to the act of a market participant entering into arrangements for the sale or purchase of a wholesale energy product, where there is no change in beneficial interests or market risk or where the beneficial interest or market risk is transferred between parties who are acting in concert or collusion.
ACER has issued an extensive guidance on wash trades as a REMIT market manipulation practice.
Article 2(2)(a)(ii) and Article 2(3)(a)(ii) of REMIT entail that either an artificial price level is actually secured (in that sense, the artificial price level must be secured by the market manipulation) or there is an attempt to secure the price at an artificial level (in that case, no actual effect on the price is required to conclude the potential REMIT breach).
Artificiality entails that the price should deviate from the price level absent any manipulation (i.e. the counterfactual price) irrespective of the size of the deviation.
For the qualification that the price is artificial, it is not necessary to examine whether it is abnormally high or low.
A price will be considered artificial if it does not correspond to the genuine intersection of demand and supply reflecting market fundamentals.
In the event prices are at an artificial level, the market participant’s conduct and its potential impacts on the market should be further assessed (existence of legitimate reasons, compliance with accepted market practices).
On 22 March 2018 the ACER released the Guidance Note 1/2018 on the application of Article 5 of REMIT on the prohibition of market manipulation, Transmission Capacity Hoarding.
In the said document ACER underlines that the efficient use of interconnectors across Europe is a critical element for the development of the single European electricity market.
The type of trading practices, which could constitute market manipulation in the light of the said document is, in particular, the acquisition of available transmission capacity without using it or without using it effectively.
In essence, market manipulation in the form of capacity hoarding, which is a breach of REMIT, comprises two elements:
- the acquisition of a decisive part of the available transmission capacity; and
- the non-use or non-effective use of that capacity.
However, the acquisition of a decisive part of the available transmission capacity is not a necessary condition for attempted market manipulation (which clearly follows from Articles 2(3)(a) and 5 of REMIT).
As ACER underlines, in this case, it is important to analyse the market participant’s intention to manipulate the market through the capacity hoarding strategy.
Some examples of the said manipulative behaviour were investigated in 2018 and 2019 by the Danish Regulatory Authority for Energy.
Pursuant to the ACER’s Infoflash of 7 December 2018, Energi Danmark A/S was fined by the Danish regulator for the capacity hoarding on the Nordic wholesale electricity market in 2015.
According to the Danish regulator and ACER, Energi Danmark A/S hoarded capacity on the interconnectors for electricity by trading with itself in ten instances during 2015, which hampered competition and the trades rendered, or had the potential of rendering, misleading signals or artificial prices on the intraday wholesale electricity market.
The Energi Danmark A/S was charged with a fine of 750,000 DKK (approximately EUR 100,000), which was accepted by the company bringing a case to a close. In addition, the revenue obtained through the manipulative behaviour (amounting to 354,000 DKK - approximately EUR 47,000) have been confiscated.
As another example, on 15 January 2019 it was announced that Neas Energy A/S was charged and accepted to pay a fine for four counts of manipulation (capacity hoarding) on the intraday Nordic wholesale electricity market during 2015.
In this case the Danish State Prosecutor for Serious Economic and International Crime has charged Neas Energy A/S with a fine of 150,000 DKK (approximately 20,000 euros), the revenue obtained by the company through the market manipulation has also been confiscated.
Read on capacity withholding as a market manipulation practice.
Read on phishing as a market manipulation practice.
Industrial best practices on the prohibition of market manipulation under REMIT
Nord Pool Consulting AS document of 15 August 2017 “REMIT Best Practice, A sector review on how to comply with REMIT related to inside information and market abuse“ (p. 39) observed that most common causes for market manipulation include:
1. intentional manipulation to increase profits,
2. unintended or negligent manipulation caused by unawareness of what is prohibited or technical or human errors,
3. spreading information,
4. insufficient or wrong information.
The said document recommended that:
1. market participants should implement measures to reduce the risk of employees manipulating the market, including control measures;
2. measures to avoid both intentional and unintentional market manipulation should include risk assessment and awareness training;
3. the most important step to prevent market manipulation is to ensure that the employees are aware of what kind of behaviour could be manipulative, hence all market participants should have mandatory trainings for traders (these should also include training on specific market manipulation scenarios);
4. another important step to prevent market manipulation is to conduct a market abuse risk assessment, it should be based on all types of market manipulation described in the ACER Guidance, it should be also considered whether other types of manipulation are relevant.
The aforementioned Nord Pool Consulting AS document of 15 August 2017 also emphasised the importance of good documentation procedures on all implemented measures. the said documentation should include the following main elements:
1. traders should have a clear documented mandate and clear instructions on how to trade, deviations should be also documented;
2. the traders themselves should document their behaviour in situations where they enter into unusual or exceptional transactions or made unusual or exceptional profit/loss, or if there have been other unusual or exceptional situations or market conditions;
3. compliance should have full access to such documentation;
4. what a trader can and cannot do should should be clearly specified in Instructions and procedures;
5. given that errors, for instance when placing orders in the wholesale energy market, can have significant impact on the market and may constitute market manipulation, market participants markets should have routines and procedures in place to prevent unintentional and negligent manipulation, such as:
- automatic/manual alarms/checks, for instance if the orders deviate significantly from normal,
- functionality that prevents self-trading,
- compare orders with previous day’s orders,
- check whether the orders placed equal the orders in the internal system and/or correspond to the production plan,
- four-eyes principle: the orders may be checked by another person before submitting them,
- as far as possible avoid manual steps (copy/paste) in planning /bidding process,
- check that orders are logical, i.e. that fields contain values or that purchase volumes are not increasing with increased price;
6. market participant should develop a list exemplifying practical issues such as:
- never coordinate trading activities or discuss pricing strategies with other market participants – no cooperation or attempt of cooperation or information sharing,
- there should be a real desire to trade behind all orders – never place an order designed not to be executed,
- do not place orders with the intention of affecting reference prices,
- consider how the available capacity is offered into the total market - even if not all available capacity is offered in every market segment, it is recommended that the total available capacity is always offered in all market segments combined, unless there is a legitimate reason for not offering all available capacity;
7. when it comes to automated trading:
- market participants should define process for approving the algorithm before it is put into operation,
- a risk assessment relating to the risk of market manipulation should be made,
- the identified risks should be documented and appropriately addressed,
- it should always be possible to identify the person who has the primary responsibility for the automated trading (having the authority to stop trading in necessary instances), the said person should be informed in writing of the risks and responsibilities involved.
ACER's annual report on its activities under REMIT in 2012 mentioned four cases related to potential breach of the prohibition of market manipulation according to Article 5 of REMIT.
Three cases were brought to the Agency's attention through notifications of national regulatory authorities (NRAs) or persons professionally arranging transactions in accordance with Articles 15 and 16 of REMIT respectively, while one case was initiated by the Agency after analysing information in the media.
The Agency's activities consisted of coordination of the concerned NRAs. One of the cases had potential cross-border impact and therefore required the establishment and coordination of an investigatory group consisting of all concerned NRAs.
As ACER reported, following the review, three of the cases were closed by the competent NRAs without a breach of REMIT being found.
Recitals (13) and (14) of REMIT
(13) Manipulation on wholesale energy markets involves actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand, including actual availability of production, storage or transportation capacity, and demand. Forms of market manipulation include placing and withdrawal of false orders; spreading of false or misleading information or rumours through the media, including the internet, or by any other means; deliberately providing false information to undertakings which provide price assessments or market reports with the effect of misleading market participants acting on the basis of those price assessments or market reports; and deliberately making it appear that the availability of electricity generation capacity or natural gas availability, or the availability of transmission capacity is other than the capacity which is actually technically available where such information affects or is likely to affect the price of wholesale energy products. Manipulation and its effects may occur across borders, between electricity and gas markets and across financial and commodity markets, including the emission allowances markets.
(14) Examples of market manipulation and attempts to manipulate the market include conduct by a person, or persons acting in collaboration, to secure a decisive position over the supply of, or demand for, a wholesale energy product which has, or could have, the effect of fixing, directly or indirectly, prices or creating other unfair trading conditions; and the offering, buying or selling of wholesale energy products with the purpose, intention or effect of misleading market participants acting on the basis of reference prices. However, accepted market practices such as those applying in the financial services area, which are currently defined by Article 1(5) of Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) and which may be adapted if that Directive is amended, could be a legitimate way for market participants to secure a favourable price for a wholesale energy product.
An example described in the above report in greater detail was as follows.
In view of the development of electricity prices in the Member State concerned in early 2012 and press reports claiming that speculation of electricity traders nearly caused a blackout and significant price peaks, the Agency contacted the relevant NRA and requested background information to be able to assess a potential breach of the provisions in REMIT.
According to the information received, the NRA assessed the case as potentially breaching national security of supply provisions. However, no breach of the provisions in REMIT was detected. The Agency therefore closed the case.
ACER's annual report on its activities under REMIT in 2014 (p. 47) described more examples of potential market manipulation in the wholesale electricity market brought to the attention of energy regulatory authorities.
Among them was the case where the Agency and the relevant NRA were notified by an energy exchange on a case potentially involving price manipulation of several wholesale energy products.
Identical orders were introduced and withdrawn several times during the day in related products. After evaluating the cross market movements and the fundamental data available, a combination of actions in different markets for the same period could not be proved.
Also fundamental information justified some of the withdrawn bids.
In particular, a failure in one power station produced chain effects in other power stations owned by different market participants, explaining the amount of bids withdrawn being higher than expected.
Another potential market manipulation related to the wholesale gas market: a market participant placed an unusual number of orders for an illiquid month-ahead product.
In several instances the company acted on both sides (placing bids and asks), which were removed from the market before being executed. Most of the orders were placed during the market closing period and were only upheld during a few minutes.
The behaviour created the impression that the market participant was not interested in executing the orders and only intended to affect the closing price of the month-ahead product.
The market participant was requested to provide further information on the behaviour and was interviewed by the relevant NRA.
The case was closed with a warning from the NRA to the involved market participant, but no sanction was applied as this time the NRA had no sanctioning powers. The market participant committed to change the behaviour in the market.
Another case of alleged market manipulation investigated by Ofgem concentrated on failure to provide accurate information to the wholesale energy market by the Transmission System Operator - National Grid Electricity Transmission plc’s (NGET).
Investigation focused on concerns that NGET had breached the prohibition of market manipulation (Article 5 of REMIT,) during specific periods between November 2015 and January 2016.
During these periods, NGET erroneously caused incorrect de-rated capacity margin (DRM) calculations to be published through Elexon’s online platform.
According to Ofgem, there was clear evidence that this resulted in false or misleading signals as to the supply of, demand for, or price of wholesale energy products being given to the market, contrary to Article 5 of REMIT, as defined under Article 2(2)(b) - see details in the Ofgem investigates National Grid Electricity Transmission plc under REMIT for publishing incorrect market information.
Another example of the REMIT enforcement of the prohibition of market manipulation was the fine of € 5 million imposed in 2018 by the French CRE on VITOL S.A. for unlawful trading practices on the French Southern virtual Gas Trading Point (“PEG Sud”) between 1 June 2013 and 31 March 2014.
According to the CRE, “VITOL S.A. carried out, over the course of 65 cases spread over 54 trading days a modus operandi consisting of the following steps:
- First, VITOL S.A. would issue multiple sell orders, generally at the beginning of the trading day (especially before 3 p.m.), when liquidity was low. As the day moves along, VITOL S.A. would issue sell orders at gradually decreasing prices. These sell orders would then decrease after 4 a.m. during the more liquid period of the day;
- Second, once prices had decreased, VITOL S.A. would engage in important purchases;
- Third, after having proceeded with those purchases, VITOL S.A. would cancel its sell orders to finish the day as a net buyer.
VITOL S.A.’s modus operandi was, on the one hand, likely to give the market misleading signals as to the supply or demand on the PEG Sud and, on the other hand, in the absence of any counterevidence from VITOL S.A., this behaviour did not follow a rational economic logic.”
On 18 June 2021 the French Conseil d’Etat upheld the CRE sanction committee’s 2018 decision against the company Vitol S.A. for market manipulation on the French gas market (REMIT Quarterly Issue No. 25 /Q2 2021).
ACER’s Consolidated Annual Activity Report 14 June 2019 for the year 2018 mentions (p. 12, 13) that during 2018, the automated market surveillance screening of the data collected by ACER under the REMIT reporting mechanisms triggered around 8,000 alerts per month, of which 1,000 were classified as “high-intensity” alerts that were manually assessed by surveillance experts of the ACER.
The results, i.e. potential breaches of REMIT, were shared with NRAs (approximately 70 notifications each month) for their follow up, as they are responsible for investigation and enforcement under REMIT.
In several instances the Agency followed the shared alerts up by providing a preliminary initial assessment kick-starting the investigation of the relevant national regulatory authority.
The said ACER’s Report of 14 June 2019 (p. 17) refers also to the growing number of enforcement actions by national authorities against market participants for abusive conduct, with total fines amounting to around EUR 5.4 million in 2018.
An important example of manipulative practices in the form of giving misleading signals as to the supply of electricity is placing offers to sell electricity in intraday trading on the energy exchange when the electricity offered or sold was not in fact available, nor was there any intention to procure or generate it.
Such a behaviour was sanctioned by the German Bundesnetzagentur with fines of €200,000 imposed on Energi Danmark A/S and €175,000 on Optimax Energy GmbH for manipulation on the German intraday electricity market EPEX Spot SE in connection with the system imbalances in June 2019.
The German authority underlined that dangerous under-coverages in balancing groups “must not bring gains” and that “reaping profits at the expense of system stability is against the law.”
This case clearly undermines legality of the bidding strategy consisting in predetermined intent of covering possible shortages in the balancing electricity market.
The German Authority “found that Energi Danmark and Optimax Energy issued sell orders on the intraday market towards the end of the trading sessions and close to the actual delivery, in order to benefit from the abnormally high prices observed on these days.
Yet, the electricity offered by Energi Danmark and Optimax Energy was not available to be supplied by them and the companies did not deliver it.
The sales of these market participants caused an imbalance in their balancing group for which they had to pay the imbalance settlement price (price for being imbalanced at the time of delivery). The imbalance settlement cost was lower than the gains derived from their transactions on the intraday market. Considering that Energi Danmark and Optimax Energy entered sell orders on the intraday market electricity that they knew they could not deliver, this trading behaviour sent misleading signals to the market as to the supply of the electricity and was found by BNetzA to be in breach of REMIT".
The Bundesnetzagentur added that on these three days, the German transmission system operators fully activated for several hours all the balancing reserves and had to take additional measures (e.g. activation of the emergency reserves from the neighbouring transmission system operators), in order to keep the power system in balance.