Futures Manipulation with “Cash Settlement”


  • Praveen Kumar,


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    • Graduate School of Industrial Administration, Carnegie Mellon University. We have benefited from the comments of Fischer Black, Robert Dammon, Michael Fishman, Steven Figlewski, Gerald Gay, Rick Green, Sanford Grossman, Kathleen Hagerty, Avraham Kamara, Bart Lipman, Francis Longstaff, Steven Manaster, Margaret Monroe, Robert Stambaugh, René Stulz, Avanidhar Subrahmanyam, Stan Zin, an anonymous referee, and seminar participants at Carnegie Mellon, Indiana, Ohio State, Wharton, and the 1991 WFA convention. We also gratefully acknowledge financial support from NSF grant SES-89–21390 (Kumar) and the BP America research chair for 1990–91 (Seppi) and from the 1991 CBOT WFA award.


This paper investigates the susceptibility of futures markets to price manipulation in a two-period model with asymmetric information and “cash settlement” futures contracts. Without “physical delivery,” strategies based on “corners” or “squeezes” are infeasible. However, uninformed investors still earn positive expected profits by establishing a futures position and then trading in the spot market to manipulate the spot price used to compute the cash settlement at delivery. We also show that as the number of manipulators grows, profits from manipulation fall to zero. However, even in the limit, manipulation still has a nontrivial impact on market liquidity. More broadly, we interpret manipulation as a form of endogenous “noise trading” which can arise in multiperiod security markets.