On Market Corners In Commodity Futures Exchanges

A futures exchange is a central financial exchange where participants buy and sell futures contracts for delivery on a specified future day. Futures markets serve two important economic functions in modern economy. The first function of futures markets is the price discovery function, which helps in facilitating efficient resource allocation. And the second function of futures markets is that they server as the place to hedge price risk due to the fluctuations of demands and supplies. So it is very important to keep the futures markets healthy and competitive. However, the practice of market manipulation because it interferes with the two functions of futures markets described above, and it undermines the interests of other participants as well. That's the reason we need to study the problem of market corners, which is the most often seen market manipulations, and find ways to solve it.This dissertation first develops a theoretic model of futures prices when market corner happens. And then in the following section, we study the negative effects of market corners on futures markets based on this model. And our results show that market corners would seriously distort market prices, which reduce the effectiveness of hedging by reducing the profits and increasing the risks of hedgers. And then we apply the game theory to find how futures price is influenced by a manipulator's trading strategies and his total wealth, considering that the trading process in futures markets is like a sum-zero game. The results of our game-theoretic model show that a manipulator with a large amount of wealth could exert great influences on futures prices, which is very crucial for a successful manipulation. Our model also explains different strategies adopted by manipulators in different phases of manipulation. And this part explains how market prices are distorted by market corners.In Chapter 5, we focus on the effectiveness of anti-manipulation measures. We first discuss the effects of prevention methods basing on the conclusions we have got in the previous sections. And then employ the game theory to assess the efficacy of regulations and harm-based sanctions. The results of our research suggest that the regulator and exchanges should spare no effort to improve their abilities in detecting market corner and levy adequate fines against it.