The Economics of the Manipulation End Game with Private Information About Positions

41 Pages Posted: 11 Feb 2009

See all articles by Craig Pirrong

Craig Pirrong

University of Houston - Department of Finance

Date Written: December 30, 2008


Private information about position sizes can exert a decisive impact on derivatives prices when traders can accumulate positions sufficiently large to permit them to exercise market power, i.e., to manipulate the market. When a large long's position size is private information, equilibrium outcomes depend on the structure of the short side of the market. If shorts are atomistic, the large long does not liquidate any of his position prior to expiration, and the resulting "delivery end game" results in large deadweight losses. If there is a large short, however, these inefficiencies can be mitigated by pre-expiration trading. These deadweight losses and the distributive effects of manipulation create gains from trade that the large short and long can split by trading prior to expiration. The short chooses a pre-expiration price at which he is willing to trade that trades off efficiency and rent extraction. Some privately informed large longs accept the shorts price. Thus, with a large short and private information about positions (a) the manipulator sometimes liquidates some or all of his position early, (b) strategic behavior causes price fluctuations unrelated to fundamental information as expiration nears, and (c) market power deadweight losses are smaller than if shorts are atomistic. Private information can also explain other phenomena observed during manipulations, such as the long suffering large losses due to an avalanche of deliveries, and the manipulator's use of "step up" orders at expiration.

Keywords: futures markets, manipulation

JEL Classification: G13, G18

Suggested Citation

Pirrong, Craig, The Economics of the Manipulation End Game with Private Information About Positions (December 30, 2008). Available at SSRN: or

Craig Pirrong (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

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