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The Anatomy of Three Scandals: Conspiracies, Beauty Contests and Sabotage in OTC Markets

Author

Listed:
  • Alexis Stenfors

    (University of Portsmouth)

  • Lilian Muchimba

    (University of Portsmouth)

Abstract
Until the Great Recession, the largely unregulated over-the-counter (OTC) markets had received little attention from compliance officers, regulators, and lawmakers. Perhaps more important than the lack of regulatory framework as such, the markets were widely perceived to be sufficiently large, liquid, efficient and competitive to withstand manipulative and collusive attempts by traders and banks. However, the status quo was radically altered in 2012, when it was revealed that major international banks had systematically manipulated the world’s most widely used interest rate benchmark. The ‘LIBOR scandal’ was quickly followed by a ‘Forex scandal’ and the discovery of grave misconduct in a range of other OTC benchmarks and markets. At the time of writing, government bonds traded on electronic trading platforms are under particular scrutiny. This paper draws on the concepts of conspiracies (Smith 1776), beauty contests (Keynes 1936) and sabotage (Veblen 1921) to reflect on why it took so long for the scandals to be discovered.

Suggested Citation

  • Alexis Stenfors & Lilian Muchimba, 2022. "The Anatomy of Three Scandals: Conspiracies, Beauty Contests and Sabotage in OTC Markets," Working Papers in Economics & Finance 2022-08, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    • Handle: RePEc:pbs:ecofin:2022-08
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    References listed on IDEAS

    as
    1. Lilian Muchimba & Alexis Stenfors, 2021. "Beyond LIBOR: Money Markets and the Illusion of Representativeness," Journal of Economic Issues, Taylor & Francis Journals, vol. 55(2), pages 565-573, April.
    2. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54, National Bureau of Economic Research, Inc.
    3. Stenfors, Alexis, 2018. "Bid-ask spread determination in the FX swap market: Competition, collusion or a convention?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 54(C), pages 78-97.
    4. Lilian Muchimba, 2022. "Could Transaction-Based Financial Benchmarks be Susceptible to Collusive Behavior?," Journal of Economic Issues, Taylor & Francis Journals, vol. 56(2), pages 362-370, April.
    5. Stenfors, Alexis & Susai, Masayuki, 2021. "Spoofing and pinging in foreign exchange markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 70(C).
    6. Veblen, Thorstein, 1921. "The Engineers and the Price System," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number veblen1921.
    7. Stenfors Alexis & Susai Masayuki, 2018. "High-Frequency Trading, Liquidity Withdrawal, and the Breakdown of Conventions in Foreign Exchange Markets," Journal of Economic Issues, Taylor & Francis Journals, vol. 52(2), pages 387-395, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banks; beauty contest; conspiracies; financial regulation; LIBOR; manipulation; OTC markets; sabotage;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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