An Analysis Of Corners And Squeezes In Futures Market

Futures market attracts numerous commodity suppliers and demanders, assembles mass trading information. Therefore, the probability of manipulation occurred in futures market is very low. But if these elements are blocked or acquired by a minority, futures market is very possible to be manipulated. Corners and squeezes events are the most popular, representative manipulation with the largest loss.This paper develops a static rational expectation model of a futures market which contains hedger, speculator and manipulator. We find that corners and squeezes can happen even if all participants are rational. To better analyze corners and squeezes behavior of the manipulator, we develop a dynamic game-theoretic model of a futures market in which prices can be manipulated by corners and squeezes from the largest long. After analyzing the trading strategies of each participant on the delivery date and near the delivery date, we get the equilibrium price which is positive with the position of the cornering long and negative with the supply of the commodity. We also find that the probability of a subsequent corner will likely increase after a successful corner.Finally, we analyze participants'behavior in some corners and squeezes events which Chinese companies encountered in the international derivative markets and Chinese futures market once happed. After analyzing the reasons why corners and squeezes happened, combined the conclusions we get from above models, we have some suggestions for controlling abroad futures trading risk: rules and regulations of Chinese supervisor must be maneuverable and adapt to international futures market; companies should treat the loss in futures market correctly, and establish a reasonable risk control system; encouraging manufacturing enterprises hedging in the futures market but forbidding them speculating; standardizing abroad agents'behavior. The suggestions for standardizing Chinese futures market are: futures exchanges should set sound rules and regulations; the supply of commodity in a futures contact should reach a certain level, futures and spot market can't be disjointed; paying attention to the position and behavior of the large, preventing them monopolizing and manipulating futures market.