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Spot market power and future market trading

Muermann, Alexander and Shore, Stephen H. (2005) Spot market power and future market trading. Discussion paper, 531. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

When a spot market monopolist participates in the futures market, he has an incentive to adjust spot prices to make his futures market position more pro…table. Rational futures market makers take this into account when they set prices. Spot market power thus creates a moral hazard problem which parallels the adverse selection problem in models with inside information. This moral hazard not only reduces the optimal amount of hedging for those with and without market power, but also makes complete hedging impossible. When market makers cannot distinguish orders placed by those with and without market power, market power provides a venue for strategic trading and market manipulation. The monopolist will strategically randomize his futures market position and then use his market power to make this position profi…table. Furthermore, traders without market power can manipulate futures prices by hiding their orders behind the monopolist's strategic trades.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2005 The Authors
Library of Congress subject classification: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 531
Date Deposited: 29 Jul 2009 10:50
URL: http://eprints.lse.ac.uk/24644/

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