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Strategic trading and manipulation with spot market power

Author

Listed:
  • Muermann, Alexander
  • Shore, Stephen H.

Abstract

When a spot market monopolist has a position in a corresponding futures market, he has an incentive to deviate from the spot market optimum to make this position more profitable. Rational futures market makers take this into account when setting prices. We show that the monopolist, by randomizing his futures market position, can strategically exploit his market power at the expense of other futures market participants. Furthermore, traders without market power can manipulate futures prices by hiding their orders behind the monopolist's strategic trades. The moral hazard problem stemming from spot market power thus provides a venue for strategic trading and manipulation that parallels the adverse selection problem stemming from inside information.

Suggested Citation

  • 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).
    • Handle: RePEc:zbw:cfswop:200607
    as

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    File URL: https://www.econstor.eu/bitstream/10419/25473/1/515334006.PDF
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    References listed on IDEAS

    as
    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. Kumar, Praveen & Seppi, Duane J, 1992. "Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-1502, September.
    3. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    4. 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.
    5. Pirrong, Craig, 2001. "Manipulation of Cash-Settled Futures Contracts," The Journal of Business, University of Chicago Press, vol. 74(2), pages 221-244, April.
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    Cited by:

    1. Joseph M. Milner & Panos Kouvelis, 2007. "Inventory, Speculation, and Sourcing Strategies in the Presence of Online Exchanges," Manufacturing & Service Operations Management, INFORMS, vol. 9(3), pages 312-331, July.

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    More about this item

    Keywords

    Strategic Trading; Manipulation; Spot Market Power;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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