Forensic Finance

Market Manipulation
Market manipulation involves deliberately influencing financial markets to gain unfair advantage, often drawing significant academic, governmental, and media attention. In forensic finance, market manipulation is crucial as it uncovers deceptive practices like the manipulation of benchmarks (e.g., LIBOR) and trading activities (e.g., spoofing), which forensic analysts investigate to uphold market integrity and prevent financial crimes.
Overview
Market manipulation is a critical area of concern in finance, drawing substantial academic research and widespread attention from government bodies and media outlets. A notable example is the manipulation of the London Interbank Offered Rate (LIBOR), once a cornerstone of global finance, used as a reference for variable interest rates and derivatives worth trillions. Investigative journalism and academic studies exposed irregularities in LIBOR reporting, leading to significant penalties for involved firms and its eventual replacement by the Secured Overnight Financing Rate (SOFR). Theoretical research, like Zhang's (2022) study on cross-market derivative manipulation, highlights how such manipulative practices can harm market participants and suggests policy measures to curb these activities.
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In addition to benchmark manipulation, other forms of market manipulation, such as those affecting volatility indexes like the Chicago Board Options Exchange's (CBOE) Volatility Index (VIX), have also been scrutinized. Research by Griffin and Shams (2018) documented unusual trading patterns around VIX settlement times, raising suspicions of manipulation aimed at benefiting derivative positions. Despite adjustments to the VIX settlement process by the CBOE, irregularities persisted, indicating the challenges in fully eliminating manipulation from financial markets. Similar concerns have been raised about other markets, prompting investigations and adjustments in trading practices to enhance market integrity.
The broader literature on market manipulation also explores the actions of mutual funds, hedge funds, and private equity funds, particularly around reporting periods. Studies have shown that these entities sometimes manipulate stock prices to inflate reported returns, a practice linked to broader issues of transparency and fairness in financial reporting. Despite the growing body of research on these practices, areas like derivatives and spoofing remain underexplored, representing opportunities for further academic inquiry. Overall, forensic finance plays a vital role in identifying and addressing market manipulation, helping to maintain trust in financial markets.
Relevant Papers
Competition and Manipulation in Derivative Contract Markets
Zhang (2022)
Manipulation in the VIX?
Griffin and Shams (2018)
Financial Market Misconduct and Public Enforcement: The Case of Libor Manipulation
Gandhi Et Al. (2021)
Strategic Trading Behavior and Price Distortion in a Manipulated Market: Anatomy of a Squeeze
Merrick Et Al. (2005)