Though complicated in implementations, neither market power nor fraud is sporadic in commodities futures markets. Although such perplexity does constrain understandings as well as prosecution attempts (Fischel and Ross, 1991; Markham, 1993; Pirrong, 2010), basic market functions, such as hedging and price discovery are apparently weakened with fraudulent prices (Hull, 2003). Some manipulations shaped the regulatory framework in commodities futures markets, like the 19th century corner in grain, which generated the initial need for regulations (Lower, 1991; Sharp, 2009). Others altered the construction of the market, such as the turbulence in onions contracts in the 1950s, which led to a ban for trading onion futures till today (Markham, 1991). But by far, the proportion of detected manipulations is widely believed small.
With respect to alleged manipulations, attentions are particularly drawn to market power and energy markets. Hopefully, Table I will illustrate a tip of the iceberg regarding the real world situations in the context. Besides, the Pirrong (2010) finds profusion of market power manipulations in energy markets. Thus, the rest of the passage will assess the potential, the implications, and the regulatory ability sequentially of market manipulations, with inclination to market power manipulations and energy market. Legal definitions (Pirrong, 2010), adaptability of the commission (Pirrong, 1993), backward detection difficulties (Lower, 1991), and intention proving (Markham, 1991) though existing are determined more of law than of market and thus will not be assessed in detail.
In the academia of economics, analyses attribute manipulations to economic frictions, like supply and demand conditions, and transportation and storage costs (Markham, 1991). Before delivery month, the number of open interest in the futures markets might surplus the amount of supply in spot markets, as the majority of the positions would be settled by cash prior to expiration (Hull, 2003). This gives large position holders opportunities to influence supply and demand by abnormally requesting physical delivery at expiration for many commodities, such as crude oil, wheat and aluminium. As a result, they either alter prices in spot markets or demand a premium from its counterparts for cash settlement (Hull, 2003; Pirrong, 2010). Moreover, the frictions caused by standardized assets further constrain the total amount of supply eligible for delivery and assist manipulations. Such illiquidity removes many difficulties during manipulations by decreasing the elasticity of demand and supply, especially for squeezes and corners in commodities futures markets (Ledgerwood and Carpenter, 2012).
Counterintuitively, manipulations are also accessible to many small-scale participants in commodities futures markets. This is partly due to the various schemes other than monopoly or monopsony emerging from unique market conditions (Ledgerwood and Carpenter, 2012)....