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Detecting Manipulation in Futures Markets: The Ferruzzi Soybean Episode

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  • Craig Pirrong
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    Abstract

    Manipulation -- the exercise of market power in a futures market -- is a felony, but recent court and regulatory decisions have made conviction of a manipulator problematic. Instead, regulators attempt to prevent manipulation. Deterrence by conviction is more efficient than prevention if manipulations can be detected with high probability. An analysis of the Ferruzzi soybean episode of 1989 demonstrates how to detect manipulation with standard statistical techniques. It is exceedingly unlikely that the price and quantity relations observed in May and July 1989 were the result of competition; they instead reflect market power. The ability to detect manipulation reliably suggests that existing regulation of manipulation in futures and securities markets is inefficient because it relies on costly prevention rather than deterrence. Copyright 2004, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal American Law and Economics Review.

    Volume (Year): 6 (2004)
    Issue (Month): 1 ()
    Pages: 28-71

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    Handle: RePEc:oup:amlawe:v:6:y:2004:i:1:p:28-71

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    Cited by:
    1. Cumming, D. & Johan, S.A., 2008. "Global market surveillance," Discussion Paper 2008-002, Tilburg University, Tilburg Law and Economic Center.
    2. Cumming, Douglas & Johan, Sofia & Li, Dan, 2011. "Exchange trading rules and stock market liquidity," Journal of Financial Economics, Elsevier, vol. 99(3), pages 651-671, March.
    3. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2013. "Exchange trading rules, surveillance and insider trading," CFS Working Paper Series 2013/15, Center for Financial Studies (CFS).
    4. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2013. "High frequency trading and end-of-day price dislocation," CFS Working Paper Series 2013/16, Center for Financial Studies (CFS).
    5. Agarwalla, Sobhesh Kumar & Jacob, Joshy & Varma, Jayanth R., . "High Frequency Manipulation at Futures Expiry: The Case of Cash Settled Indian Single Stock Futures," IIMA Working Papers WP2014-02-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    6. Abrantes-Metz, Rosa M. & Kraten, Michael & Metz, Albert D. & Seow, Gim S., 2012. "Libor manipulation?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 136-150.

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