The Effect of Settlement Rules on the Incentive to Bang the Close

51 Pages Posted: 16 Jul 2016 Last revised: 17 Nov 2017

See all articles by Esen Onur

Esen Onur

Commodity Futures Trading Commission (CFTC)

David Reiffen

U.S. Commodity Futures Trading Commission (CFTC)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

Closing prices on financial exchanges are often used as reference prices in other contracts. As such, the robustness of the process that determines reference prices is an important aspect of an exchange. This paper examines whether the 2012 change in the reference (or settlement) procedure on the Chicago Board of Trade (CBT) made the closing prices more robust, especially in regard to the potential for manipulation. We propose a theoretical model exploring the incentive to manipulate closing prices under the two alternative settlement price regimes. The model generates a number of empirical predictions. To test these predictions, we make use of a unique, proprietary data set comprised of individual transactions in the CBT’s corn futures market, and find that these predictions are supported by data.

Keywords: manipulation, setttlement price, floor trading, futures markets

JEL Classification: G13, G14, G18

Suggested Citation

Onur, Esen and Reiffen, David, The Effect of Settlement Rules on the Incentive to Bang the Close (November 2017). Available at SSRN: https://ssrn.com/abstract=2810225 or http://dx.doi.org/10.2139/ssrn.2810225

Esen Onur

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

David Reiffen (Contact Author)

U.S. Commodity Futures Trading Commission (CFTC) ( email )

Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
United States

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