The Effect of Settlement Rules on the Incentive to Bang the Close
51 Pages Posted: 16 Jul 2016 Last revised: 17 Nov 2017
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The Effect of Settlement Rules on the Incentive to Bang the Close
The Effect of Settlement Rules on the Incentive to Bang the Close
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: Suggested Citation