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Financial intermediaries in the midst of market manipulation: Did they protect the fool or help the knave?

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  • Atanasov, Vladimir
  • Davies, Ryan J.
  • Merrick, John J.

Abstract

We examine a fund manager's alleged manipulation of platinum and palladium futures settlement prices. Using benchmarks from parallel electronic markets, we find that the manager's market-on-close trading causes significant settlement price artificiality. Defying predictions that competition among floor traders should limit any artificiality, the artificiality increases in the second half of the alleged manipulation period. Between 35% and 52% of the latter-period artificiality is directly attributable to noncompetitive floor prices. Inflated floor volume contributes a similar proportion to artificiality via the exchange's trade-weighted settlement price formula. We estimate that floor counterparties reaped more than $6.0 million in excess profits.

Suggested Citation

  • Atanasov, Vladimir & Davies, Ryan J. & Merrick, John J., 2015. "Financial intermediaries in the midst of market manipulation: Did they protect the fool or help the knave?," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 210-234.
  • Handle: RePEc:eee:corfin:v:34:y:2015:i:c:p:210-234
    DOI: 10.1016/j.jcorpfin.2015.07.011
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    Cited by:

    1. Esen Onur & David Reiffen, 2018. "The effect of settlement rules on the incentive to Bang the Close," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(8), pages 841-864, August.
    2. Chan, Shu Hui & Huang, Yu Chuan & Lin, Sheng-Min, 2020. "Market transparency and closing price behavior on month-end days: Evidence from Taiwan," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    3. Robert Jarrow & Scott Fung & Shih-Chuan Tsai, 2018. "An empirical investigation of large trader market manipulation in derivatives markets," Review of Derivatives Research, Springer, vol. 21(3), pages 331-374, October.
    4. Angelo Aspris & Sean Foley & Peter O'Neill, 2020. "Benchmarks in the spotlight: The impact on exchange traded markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1691-1710, November.
    5. Cumming, Douglas & Dannhauser, Robert & Johan, Sofia, 2015. "Financial market misconduct and agency conflicts: A synthesis and future directions," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 150-168.
    6. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2015. "Exchange trading rules, surveillance and suspected insider trading," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 311-330.
    7. Cumming, Douglas & Ji, Shan & Peter, Rejo & Tarsalewska, Monika, 2020. "Market manipulation and innovation," Journal of Banking & Finance, Elsevier, vol. 120(C).
    8. Ouyang, Liangyi & Cao, Bolong, 2020. "Selective pump-and-dump: The manipulation of their top holdings by Chinese mutual funds around quarter-ends," Emerging Markets Review, Elsevier, vol. 44(C).
    9. Douglas Cumming & Sofia Johan & Denis Schweizer, 2017. "Information systems, agency problems, and fraud," Information Systems Frontiers, Springer, vol. 19(3), pages 421-424, June.

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    More about this item

    Keywords

    Market manipulation; Bang the close; NYMEX; Futures contracts; Platinum; Floor trading;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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