Thursday, May 19, 2011
Posted by D. Daniel Sokol
ABSTRACT: Market manipulation is a poorly understood phenomenon, due in part to difficulties in applying conventional antitrust tools to explain loss-based opportunism. Because trading to intentionally incur losses violates assumptions concerning the self-interest hypothesis and the need for market power to move prices, traditional tools need revisions to explain manipulative behavior. In this paper, we assist this process by developing a framework to explain manipulation as the intentional loss of money on price-making transactions to benefit the value of related price-taking positions. This framework could simultaneously improve liquidity and compliance by providing definitional and analytic certainty concerning what behavior constitutes manipulation.