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Manipulation of Cash-Settled Futures Contracts

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  • Pirrong, Craig

Abstract

Replacement of delivery settlement of futures contracts with cash settlement is frequently proposed to reduce the frequency of market manipulation. This article shows that it is always possible to design a delivery-settled futures contract that is less susceptible to cornering by a large long than any given cash-settled contract. Such a contract is more susceptible to manipulation by large shorts, however. Therefore, cash settlement does not uniformly dominate delivery settlement as a means of reducing the frequency of market power manipulations in derivatives markets. The efficient choice of settlement mechanism depends on whether supply and demand conditions favor short or long manipulations. Copyright 2001 by University of Chicago Press.

Suggested Citation

  • Pirrong, Craig, 2001. "Manipulation of Cash-Settled Futures Contracts," The Journal of Business, University of Chicago Press, vol. 74(2), pages 221-244, April.
    • Handle: RePEc:ucp:jnlbus:v:74:y:2001:i:2:p:221-44
    DOI: 10.1086/209671
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    Citations

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    Cited by:

    1. Adam-Müller, Axel F. A. & Wong, Kit Pong, 2002. "The impact of delivery risk on optimal production and futures hedging," CoFE Discussion Papers 02/08, University of Konstanz, Center of Finance and Econometrics (CoFE).
    2. Zhang, Anthony Lee, 2022. "Competition and manipulation in derivative contract markets," Journal of Financial Economics, Elsevier, vol. 144(2), pages 396-413.
    3. Lien, Donald & Tse, Yiu Kuen, 2006. "A survey on physical delivery versus cash settlement in futures contracts," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 15-29.
    4. Owen Lamont, 2004. "Go Down Fighting: Short Sellers vs. Firms," NBER Working Papers 10659, National Bureau of Economic Research, Inc.
    5. Stenfors, Alexis & Dilshani, Kaveesha & Guo, Andy & Mere, Peter, 2024. "Detecting the risk of cross-product manipulation in the EUREX fixed income futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 92(C).
    6. Ulrich Horst & Felix Naujokat, 2008. "Illiquidity and Derivative Valuation," Papers 0901.0091, arXiv.org.
    7. Owen Lamont, 2004. "Go Down Fighting: Short Sellers vs. Firms," NBER Working Papers 10659, National Bureau of Economic Research, Inc.
    8. Jędrzej Białkowski & Jan Koeman, 2017. "Does the Design of Spot Markets Matter for the Success of Futures Markets? Evidence from Dairy Futures," Working Papers in Economics 17/18, University of Canterbury, Department of Economics and Finance.
    9. Kaj Nystrom & Mikko Parviainen, 2014. "Tug-of-war, market manipulation and option pricing," Papers 1410.1664, arXiv.org.
    10. Muermann, Alexander & Shore, Stephen H., 2006. "Strategic trading and manipulation with spot market power," CFS Working Paper Series 2006/07, Center for Financial Studies (CFS).
    11. Adjemian, Michael K. & Garcia, Philip & Irwin, Scott & Smith, Aaron, 2013. "Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies," Economic Information Bulletin 155381, United States Department of Agriculture, Economic Research Service.

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