RT Journal Article SR Electronic T1 Squeeze Play: The Dynamics of the Manipulation
End Game JF The Journal of Alternative Investments FD Institutional Investor Journals SP 26 OP 39 DO 10.3905/jai.2011.14.1.026 VO 14 IS 1 A1 Craig Pirrong YR 2011 UL https://pm-research.com/content/14/1/26.abstract AB This article considers one of the most significant regulatory concerns facing derivatives markets: the case of market manipulation by means of a corner, or “squeeze.” There are many famous examples of squeezes dating back to the very origins of derivatives trading and extending to the present day. These manipulations distort prices by moving them away from the supply- and demand-driven equilibrium, which limits the effectiveness of the market as a venue for price discovery and effective hedging. Unfortunately, the dynamics of trading as a contract nears expiration have not been modeled extensively. As a result, the existing literature cannot capture many of the interesting actions and interactions observed during actual squeezes. This article fills that void by examining the effects of asymmetrical information on the trading strategies of large longs and shorts as a contract approaches expiration. It provides insight into the mechanism of real-world corners and squeezes and the associated price movements around expiration that are not driven by supply and demand.TOPICS: Options, risk management, financial crises and financial market history, exchanges/markets/clearinghouses