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Financial Market Misconduct

The Second Area of Topic

Financial market misconduct consists of illegal and illicit activities involving financial markets. We start this section with a survey of forensic research related to cryptocurrency markets and then summarize more traditional financial market misconduct research related to market manipulation and insider trading.

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Types of Financial Market Misconduct

A.

Cryptocurrencies and DeFi

Cryptocurrencies initially attracted academic interest from computer science but have since become a significant topic in finance, focusing on blockchain-based transactions outside traditional regulatory frameworks. Studies, such as those by Meiklejohn et al. (2013) and Foley et al. (2019), use clustering techniques to trace illicit activities in the cryptocurrency markets, revealing substantial dark market transactions. This field highlights the importance of blockchain data in forensic finance and poses new challenges for law enforcement in tackling financial crimes in the digital realm.

B.

Market Manipulation

Market manipulation encompasses illicit activities aimed at distorting financial markets, with significant academic research and media attention. Prominent examples include the manipulation of the London Interbank Offered Rate (LIBOR), which served as a crucial financial benchmark until investigations unveiled widespread misconduct, leading to substantial fines and the adoption of alternative rates like the Secured Overnight Financing Rate (SOFR). Research continues to explore mechanisms and impacts of market manipulation, emphasizing the need for effective regulatory enforcement and the development of more resilient financial benchmarks.

C.

Insider Trading

Insider trading involves trading based on non-public, material information, often leading to significant profits. Research has shown that insiders, especially those with non-routine transactions, tend to earn abnormal returns, suggesting the exploitation of private information. The detection of insider trading is challenging, but methodologies such as analyzing option market activities before major corporate events have provided insights into the prevalence of such illegal activities.

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