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Sheep in wolves' clothing: Using false signals of demand to execute a market power manipulation

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  • Craig Pirrong

Abstract

Existing formal models of market power manipulation (“corners”) focus on the “delivery end game,” but largely ignore the path to that game. Expectations about the end game matter. The delivery supply curve determines a large long's market power in the end game, and the delivery supply curve depends on what market participants expect the long will do with deliveries. If there is uncertainty about whether a long stands for delivery because he has a high demand for the commodity, and will consume it, or is manipulating, a manipulator can mimic a high value type (“strong stopper”) and exercise market power. Crucially, in the presence of this uncertainty, a long can exercise market power even if his position is smaller than deliverable supplies. This result calls into question legal precedent which typically requires a long to have a position larger than deliverable supply to find him guilty of manipulation.

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  • Craig Pirrong, 2022. "Sheep in wolves' clothing: Using false signals of demand to execute a market power manipulation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 790-802, May.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:5:p:790-802
    DOI: 10.1002/fut.22267
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    References listed on IDEAS

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    1. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, September.
    2. Pirrong, Stephen Craig, 1993. "Manipulation of the Commodity Futures Market Delivery Process," The Journal of Business, University of Chicago Press, vol. 66(3), pages 335-369, July.
    3. Brennan, Donna & Williams, Jeffrey & Wright, Brian D, 1997. "Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation," Economic Journal, Royal Economic Society, vol. 107(443), pages 1009-1022, July.
    4. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
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