Would granting futures exchanges copyright protection for prices deter some market manipulation?

Michael Giberson

In New York Mercantile Exchange Inc. v. IntercontinentalExchange Inc., the U.S. Court of Appeals, Second Circuit denied NYMEX copyright protection for its settlement prices. The decision turned on application of the merger doctrine in copyright law, which governs cases in which the expression of an idea is so completely linked to the idea itself that granting copyright protection to an author’s work would in effect grant copyright protection to the idea expressed. Since ideas are not copyrightable, when a particular expression of an idea is so closely bound to the idea itself then the expression also cannot be copyrighted.

Jeremy Murray analyzes the court’s decision in a Buffalo Law Review piece, “The Death of Copyright Protection in Individual Price Valuations, a Flawed Merger Doctrine, and Financial Market Manipulation.” There is a lot of information here, some of which I only skimmed through, but Murray offers some interesting points on the link between copyright protection for exchange settlement prices and market manipulation exercises such as that of Amaranth Advisors.

In particular, he advises that ICE’s capability to directly link its product prices to NYMEX settlement prices created conditions in which the natural gas market manipulations by a Amaranth trader could flourish (if only for a short time). Among other things, Amaranth sought to profit by holding large short positions in natural gas on ICE, then drive the NYMEX price down by dumping a small long position in the last few minutes of trading. Murray argues that if ICE was required to identify its own settlement prices, rather than copying NYMEX settlement prices, then Amaranth-style manipulations would fail: dumping contracts on one market would not automatically and exactly manipulate the price of the other.

Murray also offers some interesting speculation as to whether NYMEX would have been more successful had it pursued a claim based on “time sensitive information” rather than copyright.

(While I liked much of Murray’s analysis, to motivate his discussion of market manipulation he relies way to heavily on quotes from politician. Let’s just say I’m not willing to take the claims of Sens. Maria Cantwell and Richard Durbin as authorities on energy market operations, nor am I convinced that sharply increasing energy prices in 2007 and 2008 were due to rampant market manipulation. Thankfully, the discussion is mostly irrelevant to his broader analysis.)

NOTES: New York Mercantile Exchange Inc. v. IntercontinentalExchange Inc., 497 F.3d 109, 112 (2d Cir. 2007), cert. denied, 128 S. Ct. 1669 (2008).

We discussed the NYMEX case here earlier, see “What is a Price? The Courts Think They Know; The Courts are Wrong“. Also related is “Prices are information goods, and information wants to be expensive, because it’s so valuable” and “CFTC Holds Hearings on Oversight of Energy Trading.”

Several posts here discuss the Amaranth manipulation charges.