Should the European prohibition on market manipulation be narrowed down?

On 30 November 2007, TILEC member Matthijs Nelemans publicly defended his doctoral dissertation entitled 'The prohibition of market manipulation', which was supervised by Prof. M.S. Groenhuijsen and Prof. F.G.H. Kristen. The European prohibition of market manipulation, included in the European Market Abuse Directive, covers both disseminating false or misleading information and trading shares to initiate a price change or to cause an artificial price. Matthijs argues that this prohibition poorly characterizes market manipulation. His dissertation provides an economic background to the relevant issues and offers narrower definitions. One of his conclusions is that the prohibition of information-based manipulation should include a materiality standard in order to exclude minor forms of false or misleading information.
Furthermore, the prohibition of trade-based manipulation would benefit from being interpreted in line with his 'unsupported price pressure' standard. Whereas supported price pressure, defined as price pressure that is based on sufficient information, contributes to price efficiency, unsupported price pressure may create social costs.

A European network of competition law and economics institutes

Many of the problems raised by competition policy and market regulation gain from being addressed not only from an interdisciplinary perspective but also from an international one. Earlier this year, TILEC was active in setting up a European network of research institutions with a similar focus. The first event organized under the banner of the network took place in Bonn, Germany earlier this month. This workshop on the law and economics of competition policy was generously hosted by the Max-Planck Institute for research on collective goods. Researchers from the Amsterdam Center for Law and Economics (ACLE), the Centre for Infocommunication Law at the Hungarian Academy of Sciences, the Centre for Market and Public Organization (CMPO) at the University of Bristol, the Centre for Competition Policy (CCP) at the University of
East Anglia and TILEC joined their Germany-based colleagues to discuss various aspects of competition policy, from procedural requirements in cartel cases to the influence of competition law enforcers' experience on decisions. A similar event, specifically designed to showcase the work of the network's young researchers, will be held in Norwich, UK next June, at the initiative of CCP.

Do the European rules governing insider trading make sense?

Does authorized trading by insiders (say, by the directors of a listed company) contribute to pricing efficiency or should we ban it altogether? Is there some legal certainty with regards to the kind of information that is reqarded as inside information? Those questions were addressed in a recent TILEC/AFM seminar held in Tilburg. Eric de Bodt (University of Lille 2 and CORE) presented some empirical evidence gathered with co-authors Nihat Aktas and Hervé van Oppens. Using data on more than 2,000 US-listed companies, covering almost five years of trade, they show that, even though financial markets do not strongly respond (in terms of abnormal returns) to insider trading activities, the significant change in the price sensitivity to relative order imbalances associated with abnormal insider trades suggests that price discovery is hastened on insider trading days. François Kristen (University of Amsterdam) analyzed some key elements of the definition of inside information, as set by the recent European Union directive on market abuses. To fall under the prohibition, a piece of information must be of a precise nature, which he argues excludes market rumours, and have the capacity significantly to affect the price of an asset if publicly known, a feature that is even more problematic to assess.

Should access to the electricity grid be traded on a market?

Should European policy-makers wishing to improve the allocation of resources in the electricity sector content themselves with providing market-based incentives? A recent TILEC discussion paper by Gerd Küpper (KU Leuven) and Bert Willems (TILEC) studies the welfare implications of using market mechanisms to allocate transmission capacity in recently liberalized electricity markets. It addresses the issue as to whether access to this essential facility should be traded on a market, or whether the incumbent should instead retain exclusive usage rights. They show that granting exclusive use to the incumbent might be optimal if the capacity of the grid is small and the incumbent can reduce production costs by taking advantage of interregional production-cost differences. This result runs counter to the intuition that arbitrage leads markets to function better. The reason is that when competition is imperfect, arbitrage may reduce productive efficiency. Thus, market mechanisms for the allocation of electricity transmission capacity should be introduced only if sufficient investment in the network is guaranteed or if the market power of the incumbent is curtailed in at least one of the regional markets in which it operates.

TILEC 5th Anniversary Conference: 14 April 2008

On 14 April 2008, TILEC will celebrate its 5th anniversary with a conference devoted to the Law and Economics of Innovation. Innovation is a theme that is central to TILEC's two main research lines: 'Institutions, Competition and Regulation' and 'Law and Finance'. In the opening lecture, Andrew McLaughlin (Head of Global Public Policy and Government Affairs, Google Inc.) will set out how an innovative firm manages its way through the web of national and international regulations. A first session on 'Competition and Innovation' (with speaker Suzanne Scotchmer, UC Berkeley and a leading legal academic still to be confirmed) will then focus on the interplay between innovation, intellectual property law and competition policy. In the afternoon, a session on 'Financing Innovation' (with speakers Mike Wright, Nottingham, and Bill Megginson, U of Oklahoma) will discuss the workings of the market for seed capital and the need for financial markets themselves to innovate. The day will be closed with a distinguished panel of academics, regulators and market players on 'Regulating Innovation?': How should market regulators and competition authorities react to market innovations? Can they stimulate innovation, or do they necessarily stand in the way? More details will be provided in the next newsletter; meanwhile, mark the date in your calendar!