'Banging the Close': Price Manipulation or Optimal Execution?
43 Pages Posted: 22 Mar 2016 Last revised: 17 Sep 2016
Date Written: September 16, 2016
Abstract
This paper develops an equilibrium model of an alleged manipulative trading practice known as “banging the close”. The trading practice played a central role in the recent fixing scandal in foreign exchange markets, but there are also recent high-profile regulatory cases from equity, commodity and derivative markets. We show, in an equilibrium with an arbitrary number of strategic dealers, that the trading practice occurs naturally as the solution to dealers’ optimal execution-problem. It is not clear that “banging the close” satisfies economic definitions of price manipulation, but nonetheless the practice distorts the benchmark price as a measure of the fair value of an asset. We therefore develop specific policy advice for regulators who want to curb the practice.
Keywords: Forex Trading, Market Manipulation, Optimal Execution
JEL Classification: F3, G10, G14
Suggested Citation: Suggested Citation