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An empirical investigation of large trader market manipulation in derivatives markets

Robert Jarrow (), Scott Fung () and Shih-Chuan Tsai ()
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Scott Fung: California State University, East Bay
Shih-Chuan Tsai: National Taiwan Normal University

Review of Derivatives Research, 2018, vol. 21, issue 3, 331-374

Abstract: Abstract Using account-level transaction data in options and futures markets, we investigate the existence of market manipulation, which is the ability of large traders to trade strategically, impacting prices and making abnormal profits. First, large trader’s option positions have a quantity impact on the underlying asset’s price. Second, large traders generate significantly positive alphas from trading options and futures. Among the different investor types, proprietary dealers generate the largest positive alphas. Third, these abnormal returns are consistent with strategic trading and cross-market manipulation. The evidence supports market manipulation across the options and futures markets, but not within the futures market itself.

Keywords: Market manipulation; Futures; Options; Positive alphas; Strategic trading (search for similar items in EconPapers)
JEL-codes: G13 G15 G19 (search for similar items in EconPapers)
Date: 2018
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