Strategic trading and manipulation with spot market power

Alexander Muermann and Stephen H. Shore

No 2006/07, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: When a spot market monopolist has a position in a corresponding futures market, he has an incentive to deviate from the spot market optimum to make this position more profitable. Rational futures market makers take this into account when setting prices. We show that the monopolist, by randomizing his futures market position, can strategically exploit his market power at the expense of other futures market participants. Furthermore, traders without market power can manipulate futures prices by hiding their orders behind the monopolist's strategic trades. The moral hazard problem stemming from spot market power thus provides a venue for strategic trading and manipulation that parallels the adverse selection problem stemming from inside information.

Keywords: Strategic Trading; Manipulation; Spot Market Power (search for similar items in EconPapers)
JEL-codes: D82 G13 (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200607

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