* New "catch-all anti-fraud" measure fills some gaps
* Addresses confusion over four-part test for manipulation
* Clarity on new powers may only come with cases-lawyer
* Chilton: "Repeated attempts" to control silver market
* No specific plans for high-frequency alogrithm trading (Adds quotes from derivatives lawyers)
By Roberta Rampton and Ayesha Rascoe
WASHINGTON, Oct 26 (Reuters) - The U.S. futures regulator laid out a proposal on Tuesday that would give it greater power to combat traders who seek to manipulate prices or defraud investors.
The proposal by the Commodity Futures Trading Commission, which has a dismal record of prosecuting efforts to exert undue market control, seeks to clear up some confusion about its traditional test for price manipulation.
For the first time, the agency would be able to police "fraud-based manipulation," with the authority to prosecute attempts to manipulate markets by misleading others, CFTC Chairman Gary Gensler said.
"That fraud-based manipulation will broaden our arsenal of tools," Gensler told reporters after a public hearing where the agency laid out its latest set of proposed regulations following the sprawling Dodd-Frank Wall Street reform law.
Gensler and the CFTC's four other commissioners agreed to gather public comment for 60 days.
For a factbox on the details in the proposal, click on [ID:nN26113525].
Commissioner Bart Chilton said the proposal should help the agency get tough. He said the silver market needs attention.
"I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price," Chilton said. He declined to provide further details.
The CFTC began a probe into allegations of manipulation in silver in September 2008, but has not provided information about when it hopes to conclude. Gensler declined comment.
The commissioners will meet on Nov. 10 and 19, Dec. 1, as well as two other later dates in December, to unveil additional rules as it races to meet its legislative deadlines to finalize all proposed Dodd-Frank regulations by next July.
To watch the CFTC hearing: r.reuters.com/pyn22q
FACTBOX-Other CFTC rules unveiled Oct. 26 [ID:nN26114219]
FACTBOX-CFTC's biggest fines [ID:nN25282632]
FACTBOX-CFTC rulemaking to-do list [ID:nN22187033]
Take a Look [ID:nCFTCREG]
CFTC'S ONE SUCCESSFUL PROSECUTION
Under existing rules, the CFTC must prove traders intended to manipulate prices, causing an "artificial price" to occur in the process.
The new rule attempts to clarify what "artificial price" means, but otherwise keeps the agency's standard intact.
The proposal also gives the CFTC new "catch-all" anti-fraud powers that do not require it to prove intent, which lawyers said could be significant if applied in certain kinds of manipulation cases.
"They may feel a little more empowered on their marginal cases where they may have hesitated," said Geoffrey Aronow, a partner with the law firm of Bingham McCutchen and a former CFTC enforcement director.
The CFTC's only successful manipulation prosecution in its 36-year history was against a broker charged with manipulating settlement prices for electricity futures in 1998.
More recently, manipulation charges against four propane traders with BP (BP.L)(BP.N) were dismissed by a judge, who called the law "confusing and incomplete." BP agreed to pay a record $303 million to settle related charges.
CFTC officials who briefed reporters on the new package of proposed regulations declined to say whether the rules would have helped make the case against the propane traders.
But it's unclear whether the CFTC now has a lower bar for proving manipulation -- or instead has a broader definition for what acts are now deemed manipulative, said Tony Mansfield, a partner with McDermott Will & Emery in Washington.
Until traders see what kind of cases the CFTC pursues, it might be hard to tell whether "unwitting or careless" acts could be called manipulative, said Mansfield, a former chief trial attorney with the CFTC.
"We're going to have to learn through the specific facts as the commission and enforcement division confront them," Mansfield said. "If you're a participant or you're a trader, that's a tough circumstance to confront."
BANS ON SPOOFING, BANGING THE CLOSE
The Dodd-Frank law also requires the CFTC specifically to ban three disruptive trading practices as of July 16, 2011 -- a ban that does not require new regulations to take effect.
Included are "spoofing," in which traders make bids or offers but cancel them before execution, and "banging the close" -- acquiring a substantial position leading up to the close of trade, then offsetting the position in the final moments to manipulate the closing price.
The agency is looking at whether to go further and ban more acts that can roil markets, including practices used by high-frequency traders.
"Quote stuffing" refers to flooding the market with large numbers of rapid-fire orders and then canceling them almost immediately -- a practice that some have argued contributed to the May 6 stock market "flash crash." [ID:nN04133956]
But it stopped short of immediately proposing new rules specifically aimed at algorithmic trading. High-frequency traders use lightening-fast algorithms to make markets and take advantage of tiny imbalances. (Editing by Leslie Adler and Jackie Frank)