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

• Published date: 01 May 2022
• Author: Craig Pirrong
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/fut.22267

Received: 9 September 2021

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Accepted: 10 September 2021

DOI: 10.1002/fut.22267

RESEARCH ARTICLE

Sheep in wolves' clothing: Using false signals of demand to

execute a market power manipulation

Craig Pirrong

Department of Finance, Bauer College

of Business, University of Houston,

Houston, Texas, USA

Correspondence

Craig Pirrong, Department of Finance,

Bauer College of Business, University

of Houston, 4800 Calhoun Rd, Houston,

TX 77204, USA.

Email: cpirrong@gmail.com

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 ma-

nipulator 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.

KEYWORDS

futures markets, manipulation, regulation

1|INTRODUCTION

The most famous—or infamous—type of commodity market manipulation involves a corner, in which a trader

accumulates a long futures position that exceeds the supply of the commodity that he does not own, and which is

available at delivery points. This extreme type of manipulation has led courts and regulators to utilize comparisons of a

long's position to deliverable supply to determine whether the long had cornered the market, and could have caused

the price to be artificially high.

It is plausible that a long position in excess of deliverable supply is a sufficient condition to exercise market power,

but courts and regulators have often treated it as a necessary one.

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In this article, I demonstrate that it is not.

Specifically, I show that a long's market power depends on shorts' beliefs regarding whether the long will consume

what they deliver to him. If shorts believe that the long will not consume the commodity, but will resell it after delivery,

a result in Pirrong (1993) shows that long position in excess of supply at the delivery market is indeed a necessary

condition to exercise market power. In this article I demonstrate that if shorts believe that the long will consume the

commodity, he faces a downward sloping demand curve for the contracts he owns even if his position is smaller than

J Futures Markets. 2022;42:790–802.wileyonlinelibrary.com/journal/fut790

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© 2021 Wiley Periodicals LLC

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See, for example, Great Western Food Distributors v. Brannan 201 F.2d 476 (7th Cir. 1948); Volkart Brothers, Inc. v. Freeman 311 F.2d 52 (5th Cir.

1962);. Cargill, Inc. v. Hardin, 452 F.2d 1154, 1174 (8th Cir. 1971); in re Cox & Frey Comm. Fut. L. Rep. (CCH) P23,786; [1986‐1987 TRANSFER

BINDER].