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Strategic trading and manipulation in trade at settlement contracts

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  • Craig Pirrong

Abstract

Trade at settlement (“TAS”) contracts are widely employed by futures exchanges. They are an example of a “derived pricing” mechanism that reduces the transactions costs of uninformed traders. However, TAS contracts are susceptible to strategic, and indeed manipulative, trading by large intermediaries. Those with large TAS positions can profit from trading strategically/manipulatively, and this trading tends to cause excessive price movements. Moreover, some of the price impacts of such strategic trading are permanent. The severity of strategic/manipulative trading and its effects depends on the concentration of TAS positions, and information on concentration and price movements can be used to detect such trading.

Suggested Citation

  • Craig Pirrong, 2023. "Strategic trading and manipulation in trade at settlement contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(5), pages 615-634, May.
    • Handle: RePEc:wly:jfutmk:v:43:y:2023:i:5:p:615-634
    DOI: 10.1002/fut.22401
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    References listed on IDEAS

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    1. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130, World Scientific Publishing Co. Pte. Ltd..
    2. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    3. Stephen Craig Pirrong, 1995. "Mixed manipulation strategies in commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(1), pages 13-38, February.
    4. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
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