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The Self-Regulation of Commodity Exchanges: The Case of Market Manipulation

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  • Pirrong, Stephen Craig

Abstract

Influential economists argue that government regulation of manipulative practices in financial markets is unnecessary because exchanges have incentives to take nearly first-best precautions against the exercise of market power. This article shows that the theoretical arguments underlying this proposition are weak because exchange members are likely to ignore the effects of manipulation on inframarginal traders and price informativeness, competition between exchanges may be limited, and collective action problems preclude efficient exchange intervention. For these reasons, exchanges will likely take few precautions against market power. An examination of the history of self-regulation at 10 exchanges prior to the passage of laws proscribing manipulation shows that they took few, if any, measures to curb manipulation. Since the characteristics of manipulation imply that it can be deterred efficiently through the use of harm-based sanctions, this theory and evidence strongly suggest that self-regulation is an inefficient means to reduce monopoly power in financial markets. Copyright 1995 by the University of Chicago.

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  • Pirrong, Stephen Craig, 1995. "The Self-Regulation of Commodity Exchanges: The Case of Market Manipulation," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 141-206, April.
  • Handle: RePEc:ucp:jlawec:v:38:y:1995:i:1:p:141-206
    DOI: 10.1086/467328
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    References listed on IDEAS

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    Cited by:

    1. Jerry W. Markham & Daniel J. Harty, 2012. "The Impact of Electronic Communication Networks on Exchange Trading Floors and Derivatives Regulation," Chapters, in: Geoffrey Poitras (ed.), Handbook of Research on Stock Market Globalization, chapter 12, Edward Elgar Publishing.
    2. Maxwell, John W & Lyon, Thomas P & Hackett, Steven C, 2000. "Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 583-617, October.
    3. Meeus, Leonardo, 2011. "Why (and how) to regulate power exchanges in the EU market integration context?," Energy Policy, Elsevier, vol. 39(3), pages 1470-1475, March.
    4. Kolesnik, Georgiy, 2015. "Modelling "race to the bottom" effect on the self-regulated markets," MPRA Paper 64138, University Library of Munich, Germany.
    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. Pirrong, Craig, 2017. "The economics of commodity market manipulation: A survey," Journal of Commodity Markets, Elsevier, vol. 5(C), pages 1-17.
    7. 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.
    8. Bendikov, Mikhail & Kolesnik, Georgiy, 2013. "Конкуренция Саморегулируемых Организаций И Эффективность Рынков [Self-regulatory organizations competition and the market efficiency]," MPRA Paper 47812, University Library of Munich, Germany.
    9. Grajzl, Peter & Murrell, Peter, 2007. "Allocating lawmaking powers: Self-regulation vs government regulation," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 520-545, September.
    10. Stango, Victor, 2003. "Strategic Responses to Regulatory Threat in the Credit Card Market," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 427-452, October.
    11. Mahoney, Paul G., 1999. "The stock pools and the Securities Exchange Act," Journal of Financial Economics, Elsevier, vol. 51(3), pages 343-369, March.
    12. Geoffrey Poitras, 2012. "From the Renaissance Exchanges to Cyberspace: A History of Stock Market Globalization," Chapters, in: Geoffrey Poitras (ed.), Handbook of Research on Stock Market Globalization, chapter 3, Edward Elgar Publishing.
    13. ap Gwilym, Rhys & Ebrahim, M. Shahid, 2013. "Can position limits restrain ‘rogue’ trading?," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 824-836.
    14. Chao Chen & Zhong‐guo Zhou, 2009. "Rise and Fall of the First Financial Futures Market in China: The Case of Chinese Government Bond Futures," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(2), pages 110-124, March.
    15. Chang Ma, 2020. "Self-regulation versus government regulation: an externality view," Journal of Regulatory Economics, Springer, vol. 58(2), pages 166-183, December.
    16. Michael W. Toffel & Jodi L. Short, 2011. "Coming Clean and Cleaning Up: Does Voluntary Self-Reporting Indicate Effective Self-Policing?," Journal of Law and Economics, University of Chicago Press, vol. 54(3), pages 609-649.
    17. Peter Andrews, 2011. "Economic Evidence and Financial Regulation," Chapters, in: Christopher J. Green & Eric J. Pentecost & Tom Weyman-Jones (ed.), The Financial Crisis and the Regulation of Finance, chapter 4, Edward Elgar Publishing.
    18. 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.
    19. Carole Comerton-Forde & Tālis J. Putniņš, 2014. "Stock Price Manipulation: Prevalence and Determinants," Review of Finance, European Finance Association, vol. 18(1), pages 23-66.
    20. 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).
    21. Geoffrey Poitras (ed.), 2012. "Handbook of Research on Stock Market Globalization," Books, Edward Elgar Publishing, number 13048.

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