Manipulation of the Commodity Futures Market Delivery Process

Pirrong, Stephen Craig

doi:10.1086/296608

Cited by 61 publications

(46 citation statements)

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“…A general implication of manipulation models (see, e.g., Pirrong, 1993), which is also a prediction of our model (implication 3), is that successful manipulation will be followed by price changes in the opposite direction, or what are termed reversals. The basic idea is that the price prior to the settlement period represents an estimate of the fundamental price before closing on day t, and hence that, if manipulation occurred on day t, it will be reflected in the differences between the closing price and The table shows OLS regression results testing for the effect of the CBT settlement rule changes.…”

Section: Reversalssupporting

confidence: 62%

The effect of settlement rules on the incentive to Bang the Close

Onur

Reiffen

2018

Journal of Futures Markets

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Closing prices on financial exchanges are often used as reference prices in other contracts. As such, the robustness of the process determining closing prices is an important feature of exchanges. This paper examines whether the 2012 change in the Chicago Board of Trade's (CBT) closing price procedure made reference prices more robust, especially regarding potential manipulation. We propose a theoretical model exploring incentives to manipulate reference prices under two alternative closing price regimes. We test several predictions of the model using a proprietary data set comprised of individual transactions in CBT corn futures, and find empirical support for these predictions.

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Section: Reversalssupporting

confidence: 62%

The effect of settlement rules on the incentive to Bang the Close

Onur

Reiffen

2018

Journal of Futures Markets

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“…Settlement nonperformance penalties and squeeze incentives 7.1. Settlement nonperformance penalties in cash and futures markets Pirrong (1993) emphasizes the role of economic frictions such as transportation and transactions costs in the delivery squeeze of physical commodities. Although neither of these costs is important for financial securities, settlement-related frictions can potentially play an important role in a squeeze of financial securities.…”

Section: Trading and Heterogeneity Of Beliefsmentioning

confidence: 99%

“…Futures market participants, futures exchanges, and futures markets regulators are all very concerned about delivery squeeze attempts since they distort prices, hamper price discovery, and create deadweight losses (see Pirrong, 1993). In particular, squeeze-generated sustained price distortions erode the beneficial economic role of futures markets by significantly reducing the effectiveness of the contract for hedging (see, e.g., Figlewski, 1984;Merrick, 1988).…”

Section: Introductionmentioning

confidence: 99%

Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze

Merrick

Naik

Yadav

2005

Journal of Financial Economics

105

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This paper investigates an attempted delivery squeeze in a bond futures contract traded in London. Using cash and futures trades of dealers and customers, we analyze their strategic trading behavior, price distortion, and learning in a market manipulation setting. We argue that marked differences in settlement failure penalties in the cash and futures markets create conditions that favor squeezes. We recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity dates, and that exchanges mark-to-market

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“…2 If the seller of 1 Pirrong (1993) derives necessary and sucient conditions for manipulating futures prices at contract expiry. Pirrong (2001) compares the probability of market manipulation for deliverysettled with that for cash-settled futures contracts.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Delivery Risk on Optimal Production and Futures Hedging

Adam-Müller

Wong

2002

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractMultiple delivery specications exist on nearly all commodity futures contracts. Sellers are typically allowed to choose among several grades of the underlying commodity. On the delivery day, the futures price converges to the spot price of the cheapest-to-deliver grade rather than to that of the par-delivery grade of the commodity. This imposes an additional delivery risk on hedgers. This paper derives the optimal production and futures hedging strategy for a risk-averse competitive rm in the presence of delivery risk. We show that, depending on its relative valuation, the delivery option may induce the rm to produce more than in the absence of delivery risk. If delivery risk is additively related to commodity price risk, the rm will under-hedge its exposure to commodity price risk. If delivery risk is multiplicatively related to commodity price risk, the rm will under-or over-hedge this exposure. For constant relative risk aversion, this is illustrated by a numerical example. JEL classication: G11, D81Keywords: delivery risk, futures, risk management, production * We gratefully acknowledge nancial support from the Germany/Hong Kong Joint Research Scheme provided by the German Academic Exchange Service (DAAD) and the Hong Kong Research Grants Council (RGC). We would like to thank Günter Franke and Donald Lien for very helpful comments and Harald Lohre for valuable research assistance. Remaining errors are our responsibility. 1The impact of delivery risk on optimal production and futures hedgingMultiple delivery specications exist on nearly all commodity futures contracts. Sellers are typically allowed to choose among several grades of the underlying commodity. On the delivery day, the futures price converges to the spot price of the cheapest-to-deliver grade rather than to that of the pardelivery grade of the commodity. This imposes an additional delivery risk on hedgers. This paper derives the optimal production and futures hedging strategy for a risk-averse competitive rm in the presence of delivery risk. We show that, depending on its relative valuation, the delivery option may induce the rm to produce more than in the absence of delivery risk. If delivery risk is additively related to commodity price risk, the rm will under-hedge its exposure to commodity price risk. If delivery risk is multiplicatively related to commodity price risk, the rm will under-or over-hedge this exposure. For constant relative risk aversio...

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Manipulation of the Commodity Futures Market Delivery Process

Cited by 61 publications

References 0 publications

The effect of settlement rules on the incentive to Bang the Close

The effect of settlement rules on the incentive to Bang the Close

Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze

The Impact of Delivery Risk on Optimal Production and Futures Hedging

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