The Commission: The Market's Eye-in-the-Sky?
political interests were conducting investigations, market participants were largely unable to assess the risks they ran because no one knew what the outcome was likely to be. During this protracted period the scale of the price excursion problem changed by an order of magnitude-a significant change when the base measure was in the billions of dollars.
The political chaos that occurred during the period for analysis of price excursions should not be overlooked. These policy influential, related perturbations complicated FERC's efforts to understand and craft effective mitigation remedies. The governor of California, the state assembly, various administrative departments, and the attorney general produced reports and conducted investigations that politicized, polarized, and in some cases personalized the effects of market outcomes. Congress was drawn in as the California congressional delegation became involved.
The California case is certainly an extraordinary one, but it illustrates what can happen when the market monitoring system must respond quickly and its mechanisms for response require slow and careful work and extensive process. This "institutional drag coefficient" is a challenge that FERC appears to be addressing by emphasizing market mitigation.
But as the saying goes, "you don't know what you don't know." Therefore, market mitigation is an imperfect method just like all methods. Further, market mitigation will not prevent attempts by market participants to maneuver around whatever design modifications are put in place. One thing that is a universal law in markets is that buyers and sellers find ways to manipulate the rules for their own self interests, including breaking rules, finding loopholes in rules, and exploiting ambiguously defined rules.
In response to this , virtually every other commodity that uses an exchanged-based mechanism for clearing prices from one bidding method or another has established robust market surveillance staffs that carefully monitor trading behavior.
The market surveillance staff in exchanges like the New York Mercantile Exchange (NYMEX) or the Chicago Board of Trade (CBOT) advocates for rule changes where appropriate. But they also investigate abuses, prepare cases, and prosecute alleged rule violations through a well-structured disciplinary process that directly involves participants in the process of policing trading activity. Alleged market abusers are able to defend themselves in a quasi-judicial proceeding. The market surveillance staff makes the case for abuse. A panel of peers judges and brings forward findings. When abuse is found to have occurred, disciplinary standards are applied including various penalties and sanctions for specific types of abuses. Market rules may be changed when the case identifies a flaw in the rules.
Commodity exchanges not only "self-regulate" through well-established judicially oriented internal disciplinary processes, but their surveillance staffs keep in very close contact with the Commodities Futures Trading Commission (CFTC), the federal regulatory body responsible for overseeing the conduct of business by exchanges trading commodities or various financial instruments. The CFTC approves exchange operations, keeps close tabs on their daily activities and is actively involved with surveillance. Where cases of federal law violations are identified surveillance staffs hand over cases to appropriate federal authorities.
The use of disciplinary procedures, as well as market rule changes, enable commodity and