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Manipulation of Cash-Settled Futures Contracts

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  • Pirrong, Craig

Abstract

Replacement of delivery settlement of futures contracts with cash settlement is frequently proposed to reduce the frequency of market manipulation. This article shows that it is always possible to design a delivery-settled futures contract that is less susceptible to cornering by a large long than any given cash-settled contract. Such a contract is more susceptible to manipulation by large shorts, however. Therefore, cash settlement does not uniformly dominate delivery settlement as a means of reducing the frequency of market power manipulations in derivatives markets. The efficient choice of settlement mechanism depends on whether supply and demand conditions favor short or long manipulations. Copyright 2001 by University of Chicago Press.

Suggested Citation

  • Pirrong, Craig, 2001. "Manipulation of Cash-Settled Futures Contracts," The Journal of Business, University of Chicago Press, vol. 74(2), pages 221-244, April.
    • Handle: RePEc:ucp:jnlbus:v:74:y:2001:i:2:p:221-44
    DOI: 10.1086/209671
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    Cited by:

    1. Zhang, Anthony Lee, 2022. "Competition and manipulation in derivative contract markets," Journal of Financial Economics, Elsevier, vol. 144(2), pages 396-413.
    2. Jędrzej Białkowski & Jan Koeman, 2017. "Does the Design of Spot Markets Matter for the Success of Futures Markets? Evidence from Dairy Futures," Working Papers in Economics 17/18, University of Canterbury, Department of Economics and Finance.
    3. 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).
    4. Adam-Müller, Axel F. A. & Wong, Kit Pong, 2002. "The impact of delivery risk on optimal production and futures hedging," CoFE Discussion Papers 02/08, University of Konstanz, Center of Finance and Econometrics (CoFE).
    5. Lien, Donald & Tse, Yiu Kuen, 2006. "A survey on physical delivery versus cash settlement in futures contracts," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 15-29.
    6. Owen Lamont, 2004. "Go Down Fighting: Short Sellers vs. Firms," NBER Working Papers 10659, National Bureau of Economic Research, Inc.
    7. Owen Lamont, 2004. "Go Down Fighting: Short Sellers vs. Firms," NBER Working Papers 10659, National Bureau of Economic Research, Inc.
    8. Kaj Nystrom & Mikko Parviainen, 2014. "Tug-of-war, market manipulation and option pricing," Papers 1410.1664, arXiv.org.
    9. Adjemian, Michael K. & Garcia, Philip & Irwin, Scott & Smith, Aaron, 2013. "Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies," Economic Information Bulletin 155381, United States Department of Agriculture, Economic Research Service.

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