رفتار تجاری استراتژیک و انحراف قیمت در بازار دستکاری شده : آناتومی فشار

This paper investigates an attempted delivery squeeze in a bond futures contract traded in London. Using cash and futures trades of dealers and customers, we analyze their strategic trading behavior, price distortion, and learning in a market manipulation setting. We argue that marked differences in settlement failure penalties in the cash and futures markets create conditions that favor squeezes. We recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity dates, and that exchanges mark-to-market their contract specifications more frequently, or consider a cash-settled contract on a basket of bonds.

History is filled with instances of individuals and corporations manipulating securities markets and attempting to generate high private returns from acquiring and exercising market power in securities trading. Well-publicized major manipulation episodes have occurred in bond markets,1 in commodity markets and their futures contracts,2 and also in equity markets.3 Manipulative grabs for pricing power are neither uncommon, nor even have the appearance of impropriety, in self-regulated over-the-counter markets such as the government bond markets of the United Kingdom and the United States. For example, a U.K. or U.S. bond dealing firm might acquire a large position in a particular issue and then partially restrict its availability in the market. Such an action could turn the issue “special” so that the firm could generate trading profits on its bond inventory and/or obtain disproportionately good financing rates using the bond as collateral.4 Even though there have been innumerable cases of often serious market manipulations reported in securities markets worldwide, surprisingly little is documented about the trading behavior of major players in manipulated markets. Early empirical research on market manipulation is largely confined to the study of the May 1991 Salomon squeeze (Jegadeesh, 1993; Jordan and Jordan, 1996) and the price distortion of the 30-year U.S. Treasury bond in 1986 (Cornell and Shapiro, 1989). Our paper is the first to investigate both the price distortions as well as the trading positions of market participants during a major market manipulation episode. We analyze the six-month period of an attempted delivery squeeze in the March 1998 long-term U.K. government bond futures contract traded on the London International Financial Futures and Options Exchange (LIFFE). A classic manipulative delivery squeeze in a bond futures contract takes place when a manipulator acquires a substantial long position in the futures contract and a sizeable fraction of its cheapest deliverable bond issue. The squeezer attempts to profit by restricting the supply of the cheapest deliverable issue. This action increases the price of the original cheapest-to-deliver issue and simultaneously forces holders of short futures contract positions to either deliver more highly valued bond issues or else buy back their futures contract positions at inflated prices. Futures market participants, futures exchanges, and futures markets regulators are all very concerned about delivery squeeze attempts since they distort prices, hamper price discovery, and create deadweight losses (see Pirrong, 1993). In particular, squeeze-generated sustained price distortions erode the beneficial economic role of futures markets by significantly reducing the effectiveness of the contract for hedging (see, e.g., Figlewski, 1984; Merrick, 1988). Moreover, because of the high volume of futures trading, a much larger market population feels the adverse impact of delivery squeezes relative to a cash market squeeze in any particular issue. Importantly, since the scale of futures trading can be a large multiple of trading in any individual cash market issue, bond futures contracts provide a feasible way to acquire more than 100% of the cheapest deliverable issue's supply. The judicious choice of different execution brokers and clearing accounts can help cloak the manipulator's accumulation of a major position.5 Unfortunately, while extensively acknowledged, there has been no investigation of strategic trading behavior of market manipulators during delivery squeezes.6 Our joint examination of price distortions and inventory positions of market participants is based on a rich dataset consisting of the cash and futures trades reported by individual bond dealers and the Exchange to the U.K. Financial Services Authority (FSA), the chief government regulator. First, we document the extent of price distortions, i.e., the deviations of the cheapest deliverable bond's price from its discounted cash flow value derived from the prevailing term structure. Following Kyle's (1984) model of a squeeze, we also compare the price of the futures contract to its full-squeeze and no-squeeze values (derived from the discounted cash flow values of the first-and the second-cheapest deliverable bonds) and estimate the risk-neutral squeeze probability implied by the futures price. Following industry practice, we also compute butterfly yield spreads where the “center” is the cheapest deliverable issue and the “wings” are two other bond issues with adjacent maturities. Using these metrics, we identify different phases of the squeeze. Second, we track the positions of all dealers and their customers across the different phases of the squeeze. From these inventory positions, we identify two dominant and opposing trading styles among the market participants active in the squeeze, styles that correspond to “squeezers” and “contrarians”, where squeezers are market players who initiate the squeeze and those who reinforce the squeeze, and contrarians are market players who aggressively speculate that the squeeze attempt will not succeed. Third, we identify three main ways squeezers build up their long positions in the cash market: purchase of the cheapest deliverable issue, purchase of bond futures contracts, and utilization of forward repurchase agreements. These last agreements involve a simultaneous forward purchase of the cheapest deliverable issue for settlement prior to, and a companion forward sale for settlement after, the futures delivery date. Because forward repurchase trades provide control of the cheapest deliverable issue across the futures contract delivery date, they are extremely important from the perspective of the squeeze. Fourth, since strategic traders try to manipulate market prices in order to profit from the manipulation, we compute both the raw profits and the abnormal profits (i.e., raw profits less the contribution from market-wide changes in the term structure of interest rates) of strategic traders (i.e., squeezing and contrarian customers and dealers) over the different phases of the squeeze. We also measure the profits of the remaining market participants that did not actively participate in the squeeze in a major way. Fifth, in the context of market microstructure literature, we examine whether market depth is adversely affected by the strategic trading behavior of market participants. In this regard, we shed light on how the price of the squeezed bond relates to trading flows of market participants. In the context of the information content of the order flow, we document the relation between the proprietary trades of individual dealers and their customers; specifically we find evidence of learning and concerted action. We also show how information about a potential squeeze was disseminated to the market-at-large. Finally—and, importantly, from a regulatory perspective—we show how squeeze attempts are facilitated by the marked differences that exist in conventions among the cash bond market, the bond repurchase agreements (repo) market, and the futures market regarding settlement nonperformance. Futures exchanges, for instance, levy heavy fines on contract shorts that fail to deliver against an outstanding short position. No such penalty exists for traders who fail to perform on their obligations in the cash bond and bond repurchase agreement markets. We show that this has important implications for the cross-market cash-futures arbitrage pricing relation, since arbitrageurs cannot use repos to fund their cash positions in the presence of a squeeze. Consistent with this expectation, and contrary to what one would expect from the “specialness” of the cheapest deliverable issue, we show that LIBOR replaces the general collateral rate as the marginal implied funding rate as the risk of strategic failure to perform on the obligations increases. In this context, we also show how a narrowly targeted temporary change in repo market policy announced by the Bank of England successfully ended the squeeze analyzed in this paper. This investigation of price distortions and trading positions of participants is of significant interest to both academics and market regulators. From an academic perspective, this paper provides empirical evidence on the strategic trading behavior of major market participants (both dealers and customers) in a market manipulation setting, and illustrates how learning takes place in the market place. From a regulatory perspective, this paper offers several messages. First, regulators and exchanges need to be very concerned about ensuring that squeezes do not take place, since they are accompanied by severe price distortions, and erosion of market depth, which randomly penalizes hedgers. Second, regulatory reporting should require flagging of trades such as forward term repos that provide control of key deliverable issues against the futures contracts—these trades can go unnoticed under current reporting systems, and may also slip through the internal controls of dealers as they do not change net duration risk exposures of individual traders. Third, regulators and exchanges should take notice of the fact that the marked asymmetry in penalties for settlement failures between cash and futures markets creates conditions that engender squeezes. Finally, futures exchanges should remove the sources of opportunities for squeezes in the first place. Towards this end, the exchanges should mark-to-market the specifications of their bond contracts much more frequently than they do at present, so that the prevailing market conditions do not differ dramatically from those assumed in the calculation of conversion factors. Moreover, futures exchanges should also consider requiring that their bond futures contracts be cash-settled on a basket of traded bonds, rather than requiring physical delivery against a contract specified on a bond with a notional coupon and maturity. The remainder of this paper is organized as follows. Section 2 analyzes the theoretical and institutional framework relevant to delivery squeezes. Section 3 describes the data. Section 4 describes the conditions that generated the opportunity for the squeeze we investigate in this paper. Section 5 examines different metrics of price distortions to identify the different phases of the squeeze. Section 6 investigates trading flows and trader behavior during the squeeze. Section 7 analyzes the impact on squeezes of settlement nonperformance conventions in the cash and futures markets. Section 8 offers concluding remarks.