Strategic trading and manipulation in trade at settlement contracts

Craig Pirrong

Journal of Futures Markets, 2023, vol. 43, issue 5, 615-634

Abstract: Trade at settlement (“TAS”) contracts are widely employed by futures exchanges. They are an example of a “derived pricing” mechanism that reduces the transactions costs of uninformed traders. However, TAS contracts are susceptible to strategic, and indeed manipulative, trading by large intermediaries. Those with large TAS positions can profit from trading strategically/manipulatively, and this trading tends to cause excessive price movements. Moreover, some of the price impacts of such strategic trading are permanent. The severity of strategic/manipulative trading and its effects depends on the concentration of TAS positions, and information on concentration and price movements can be used to detect such trading.

Date: 2023
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