Essay Assessment of Manipulations in Commodities Futures Markets

1355 Words 6 Pages
Though complicated in implementations, neither market power nor fraud is sporadic in commodities futures markets. Although such perplexity does constrain understandings as well as prosecution attempts (Fischel and Ross, 1991; Markham, 1993; Pirrong, 2010), basic market functions, such as hedging and price discovery are apparently weakened with fraudulent prices (Hull, 2003). Some manipulations shaped the regulatory framework in commodities futures markets, like the 19th century corner in grain, which generated the initial need for regulations (Lower, 1991; Sharp, 2009). Others altered the construction of the market, such as the turbulence in onions contracts in the 1950s, which led to a ban for trading onion futures till today (Markham, …show more content…
This gives large position holders opportunities to influence supply and demand by abnormally requesting physical delivery at expiration for many commodities, such as crude oil, wheat and aluminium. As a result, they either alter prices in spot markets or demand a premium from its counterparts for cash settlement (Hull, 2003; Pirrong, 2010). Moreover, the frictions caused by standardized assets further constrain the total amount of supply eligible for delivery and assist manipulations. Such illiquidity removes many difficulties during manipulations by decreasing the elasticity of demand and supply, especially for squeezes and corners in commodities futures markets (Ledgerwood and Carpenter, 2012).
Counterintuitively, manipulations are also accessible to many small-scale participants in commodities futures markets. This is partly due to the various schemes other than monopoly or monopsony emerging from unique market conditions (Ledgerwood and Carpenter, 2012). Many energy commodities, such as electricity, have heavy dependency on indices for price determinations and therefore, is most vulnerable to uneconomic trading (Ledgerwood and Carpenter, 2012). “Marking the close”, for instance, match the requirements of small traders in comparison to common “squeeze” and “corner” techniques in that uneconomic trading

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