High Frequency Manipulation at Futures Expiry: The Case of Cash Settled Indian Single Stock Futures

Futures markets are known to be vulnerable to manipulation, and despite the presence of a variety of mechanisms to prevent such manipulation, instances of market manipulation have been found in some of the largest and most liquid futures markets worldwide. In 2013, the Securities and Exchange Board of India identified a case of alleged manipulation (in September 2012) of the settlement price of cash settled single stock futures based on high frequency circular trading. As is well known, it is easy for any well-endowed manipulator to manipulate the price; the real challenge for the manipulator is to make the manipulation profitable. The use of high frequency circular trading of the form alleged in the SEBI order makes many forms of manipulation profitable, and makes futures market manipulation a much bigger problem than previously thought. As argued by Pirrong (2004), it is more practical to detect and punish manipulation than to try and prevent it. We develop an econometric technique that uses high frequency data and which can be integrated with the automated surveillance system to identify suspected cases of high frequency manipulation at futures expiry. We then use these techniques to identify a few suspected cases of manipulation. Needless to say, human judgement needs to be applied to decide which, if any, of these cases need to be taken up for investigation (and, after that, possible prosecution). This judgement is beyond the scope of our paper, and we refrain from making any judgement on whether any of the identified cases constitutes actual market manipulation.