Sheep in wolves' clothing: Using false signals of demand to execute a market power manipulation

Craig Pirrong

Journal of Futures Markets, 2022, vol. 42, issue 5, 790-802

Abstract: Existing formal models of market power manipulation (“corners”) focus on the “delivery end game,” but largely ignore the path to that game. Expectations about the end game matter. The delivery supply curve determines a large long's market power in the end game, and the delivery supply curve depends on what market participants expect the long will do with deliveries. If there is uncertainty about whether a long stands for delivery because he has a high demand for the commodity, and will consume it, or is manipulating, a manipulator can mimic a high value type (“strong stopper”) and exercise market power. Crucially, in the presence of this uncertainty, a long can exercise market power even if his position is smaller than deliverable supplies. This result calls into question legal precedent which typically requires a long to have a position larger than deliverable supply to find him guilty of manipulation.

Date: 2022
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