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Cross-product Manipulation in Electricity Markets, Microstructure Models and Asymmetric Information

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Abstract:
Electricity market manipulation enforcement actions have moved from conventional analysis of generator market power in real-time physical markets to materialallegations of sustained cross-product price manipulation in forward financial markets. A major challenge is to develop and apply forward market analyticalframeworks and models. This task is more difficult than for the real-time market. An adaptation of cross-product manipulation models from cash-settled financialmarkets provides an existence demonstration under uncertainty and asymmetric information. The implications of this analysis include strong empirical predictionsabout necessary randomized strategies that are not likely to be observed or sustainable in electricity markets. Absent these randomized strategies and othermarket imperfections, the means for achieving sustained forward market price manipulation remains unexplained.

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Keywords: Market manipulation, Electricity markets, Limits to arbitrage, Asymmetric information

DOI: 10.5547/01956574.40.5.cpre

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Published in Volume 40, Number 5 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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