Market manipulation is quite a controversial topic in all the commodity markets specially the futures market. The commodity futures market has been facing the market manipulation from decades. It has threatened the economy continuously and all the efforts to stop the manipulation have failed. Many have commented that redefining manipulation will be the ultimate solution for the issue. However, Jerry Markham had argued that by redefining manipulation will be ineffective for the situations and it will increase the cost. The effort will be again futile as before. He exclaimed that the Commodity Futures Trading Commission (CFTC) should be more active and empowered for adapting affirmative regulations apart from doing their predefined activities. The regulations will maintain an orderly and fair market. Thus, the CFTC will be requiring more resources than before. Markham has argued that these will reduce market manipulation and the additional cost will have limited effect on the total manipulation. The paper elaborates the effects of manipulation on commodity futures markets and also lays emphasis on its potential to cope up with the manipulation level. The paper also highlights on the trading behaviour of the major participants of the market like the customers and dealers. The elaboration of the topic is based on the futures trades that are reported to the governmental regulators by the various dealers and exchanges. The response of the prices is selective to the trading actions of the group which is selected as the market participants which are relevant at the time (Attari, Antonio and Martin, 2005).
The growth of the future market in the past thirty years has been explosive. The volume of future trading was about 3.9 million in 1960. The volume of contracts increased with the time which was due to the modifications and changes in the monetary policy. Inflation during 1960 and 1970s had also created dramatic impact on the commodity prices and thus there is huge development in the financial future contracts. The trading in the futures market has outstripped the trading in agricultural commodity future market (Pirrong, 2010).
Along with the increasing trading volume in commodity future market, many issues were raised against the trading system. The commodity futures market in United States have developed to a great extent in the past but at the end of the Civil War the contracts for the delivery of grains were switched into convertible contracts that were often used for offsetting each other. Thus, the speculators got the opportunity to undertake manipulative activities (Agarwal and Narayan, 2002). The scope for manipulation became wide spread with time and the plays of the speculators gained popularity. There were efforts in the 1880 to control these activities but all were futile due to the degree of manipulation. There were measures to prevent the cornering of the market. The CFTC were incapable of preventative the manipulative actions in the market and thus many considered to redefine manipulation so that the effects of the same will have positive impact on the trading system. However, the concept of redefining was not accepted by Jerry Markham who said that it would not increase the cost for the government and will have minute effect on the trading system. Thus, he recommended that particulars regulations should be made to control the actions.
History has encountered the speculators engaging in manipulative actions but corporations and individuals had also attempted to undertake manipulating actions for the securities market. These helped them to generate private returns from the exercising market power and the acquiring market. The major manipulations have occurred in the bond market as well as in the commodity futures. The manipulative actions are through grabbing the market price which was prominent in United States and United Kingdom (Collins, 2000).
The manipulative delivery has squeezed the futures market by manipulating the future long position in the bond market. The squeezed delivery attempted on making profit by providing restrictions on the supply of the cheapest deliverable issues. The actions however increased the price of original cheap delivery issue price and this forced the holders of futures contract to deliver the most highly valued issues or even they can buy the futures contract at the inflated prices. The participants of the futures market and futures exchanges are all responsible for the squeeze attempts. One such squeeze generates a period for persistent price distortion which has the ability to eat away the economic role of the futures markets. It has the strength to reduce the efficacy of the underlying futures contract after price discovery and hedging. The distortions are expected to arise before the actual delivery date of the contract. The high amount of futures trading in the market is subject to the squeezing. Larger portion of the population are aware of the adverse effect of the delivery squeezer which is relative to the cash market. The construction of the whole future market may provide a higher degree of squeeze during the phase of accumulation of the manipulative event (Massa and Zahid, 2008).
The early legislators had failed to prevent the manipulations as a result of which there was a wide need for an appropriate legislator which will abolish the manipulative actions. For determining what legislation was exactly needed for the prevention Congress had considered the obligation of limits that are given on every trade. The limits restricted the size of trades that is to be carried out by the foreigners and traders. This restriction limited the levels of manipulation that was carried out by the traders.