Based solely on the scale of his operations and the sequence and timing of his trades, a large trader may, under certain market conditions, be able to undertake manipulative trading strategies. In a simple market consisting only of stock and cash, the large trader may be able to profit by (1) cornering a market and squeezing the shorts or (2) creating a price trend and then reversing his sales or purchases. In a market that includes derivative securities, as well as stock and cash, the large trader may be able to profit by using derivatives to implement a market corner or by creating a trend-following strategy that takes advantage of asynchronies between the spot and derivatives markets.
While current disclosure requirements virtually eliminate opportunities to corner a market, herd effects in the stock market and lack of synchrony between stock and derivative markets may be exploited by manipulative trading strategies. Unfortunately, such manipulative strategies are difficult, if not impossible, to detect. The only useful approach to countering manipulation is therefore prevention, rather than detection.
The best preventive remedy is to improve market efficiency. Efficiency could be increased, and market manipulation curtailed, by eliminating position limits in derivatives, by developing a comprehensive margin system, by coordinating various market circuit breakers and by eliminating restrictions on index arbitrage.
