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thereby causing a crash in prices. is dumping of supplies, and the associated price crash, is some- times referred to as “burying the corpse.” us, a corner leads to a distinctive pattern in prices. e manipulated price rises relative to the prices of re- lated commodities (i.e., the price at non-delivery lo- cations), and then collapses aer the corner is over.

  • is conduct is an exercise of market power that

distorts prices and leads to inecient movements of the commodity. Since it is inecient, it is legiti- mately considered a market abuse—a manipulation.

Another kind of manipulation involves the dis- semination of false rumors or of improper price information. is last kind of manipulation is es- pecially problematic when the misreported prices are used to determine the payos on contracts.

are legitimate sources of regulatory and legislative concern, although considerable care should be devoted to determining the ecient way to re- duce the frequency and severity of manipulations.

Since market power manipulations typically in- volve the accumulation of a large position, one way to combat them is to impose limits on the sizes of positions that market participants can hold. Unfortunately, it is ecient for some market participants to hold large positions for legitimate hedging or speculative reasons, and position lim- its can constrain these ecient trades. Moreover, the susceptibility of a market to manipulation varies over time due to changes in market condi- tions (e.g., a drought that reduces available sup- plies), but position limits are dicult to adjust to such changes in a discriminating fashion.

Yet another kind of manipulation involves con- centrated trading activity near the settlement of a futures contract. Some futures prices, such as the price of NYMEX natural gas futures, are used to determine the nal prices of OTC derivatives transactions. A rm with a large position in an OTC derivative may earn a larger prot if the nal settlement price of the NYMEX natural gas futures contract is lower. at party would have an incen- tive to drive down the nal settlement price of the NYMEX future, and it might be able to accom- plish this by selling excessive quantities during the period of time used to establish the NYMEX settle.

  • is “slamming the close” manipulation would

tend to distort nal settlement prices.4

All of these kinds of conduct can happen in de- rivatives markets, and do occur in fact, although their frequency is a matter of considerable dis- pute. Regardless of their frequency, they under- mine both the price discovery and risk manage- ment functions of derivatives markets. us, they

Regulators—including exchanges—can also at- tempt to intervene to prevent manipulations when they are in progress. However, these interventions are oen too little, too late, since manipulations can develop very quickly, and regulators may not become aware of them until price distortions are already manifest.

Easterbrook (1986) and Pirrong (1996, 2004) ar- gue that the most eective way to deter market power manipulations is to impose penalties aer the fact. Such ex post deterrence works best when the probability of detection is very high and the culprit has the nancial wherewithal to compen- sate those he harms. Both conditions are likely to exist in market manipulations, including market power manipulations. For instance, the price dis- tortions that result from a corner, and the associ- ated distortions in the ow of commodities, are quite distinct and perfectly observable aer the fact; the burying the corpse eect is particularly distinctive.5

4

5

For an example of an alleged “slamming” of the close, see US Federal Energy Regulatory Commission (2007). For an early, cogent legal application of these ideas, see the opinion of Mr. Justice Ta in Board of Trade of City of Chicago v. Olsen 262 US 1 (1923).

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