Document Type

Article

Publication Date

1990

Abstract

This article addresses the perplexing and important problem of how to distinguish valid, large-scale trading activity from a squeeze. Part I analyzes and reformulates what I will call the price-impact test, according to which manipulation is conduct motivated by its impact on price. This test, I contend, states a necessary but not sufficient condition for characterizing conduct as a squeeze. Part II offers a substantially different test, which I call the modified-sanctions approach. Under this approach, the price-impact test is used as a preliminary safe-harbor standard. The modified-sanctions approach goes further, however, recognizing that the essence of a squeeze is exploitation of the shorts' vulnerability to default. The only way to test for that is to determine what the price would be if the sanctions for default were limited to the ordinary measure of contract damages. Part III then compares this new test to the classical approach used by courts and other decisionmakers in squeeze cases. Here I contend that the proposed test responds to the same factors as the classical approach, but in a far less wooden way that better accounts for and Commodities Manipulation explains their significance. Decisionmakers feeling bound to follow the classical approach can nevertheless find enough play in its joints to adopt the test proposed here. Finally, an Appendix offers an examination of the economics of the squeeze.


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