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American Law and Economics Review V6 N1 2004 (28-71)
American Law and Economics Review Vol. 6 No. 1, © American Law and Economics Association 2004; all rights reserved.

Detecting Manipulation in Futures Markets: The Ferruzzi Soybean Episode

Craig Pirrong

University of Houston

Send correspondence to: Craig Pirrong, Bauer College of Business, University of Houston, Houston, TX 77204; Fax: (713) 743-4789; E-mail: cpirrong{at}uh.edu.

Manipulation—the exercise of market power in a futures market—is a felony, but recent court and regulatory decisions have made conviction of a manipulator problematic. Instead, regulators attempt to prevent manipulation. Deterrence by conviction is more efficient than prevention if manipulations can be detected with high probability. An analysis of the Ferruzzi soybean episode of 1989 demonstrates how to detect manipulation with standard statistical techniques. It is exceedingly unlikely that the price and quantity relations observed in May and July 1989 were the result of competition; they instead reflect market power. The ability to detect manipulation reliably suggests that existing regulation of manipulation in futures and securities markets is inefficient because it relies on costly prevention rather than deterrence.


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