<blockquote>
  <p>Can futures buying/selling distort price discovery?</p>
</blockquote>

<p>Yes, that is plausible although will not necessarily be the case. I will focus on put &amp; call options.</p>

<p>Consider the <a href="https://en.wikipedia.org/wiki/Put%E2%80%93call_parity" rel="nofollow noreferrer">put-call parity</a>, which I rewrite as</p>

<p><span class="math-container">$$S+P=C+K*exp(-rt)$$</span></p>

<p>where <em>S</em> denotes the stock [price], <em>P</em> put, <em>C</em> call, and <em>K</em> the strike price.</p>

<p>Buying enough call options will increase <em>C</em>. If that were the only change in the market (regarding this stock), that would "break" the put-call parity and therefore an arbitrage opportunity would ensue.</p>

<p>Since K is fixed, the only possible changes to offset <em>C</em>'s increase are an increase of <em>P</em> and/or of <em>S</em>. An agent who notices <em>C</em> going up is likely to interpret that someone else has information in the sense that <em>S</em> will go up.</p>

<p>Unless that agent also has information in the opposite direction, it would be irrational for him to buy <em>P</em> in his attempt to take advantage of the arbitrage opportunity. Thus, he is likelier to buy <em>S</em> instead of <em>P</em> at least while the put-call parity is restored. Buying <em>S</em> tends increase its price (as is the case with <em>any</em> financial instrument).</p>

<p>Similarly, in the event of <em>C</em>'s increase, the agent might set up a strategy that consists of taking a short position on <em>C</em> and hedge it by taking a long position on <em>S</em> (he might have to borrow because <em>C</em>&lt;<em>S</em>, but that is irrelevant to the point). Opening that long position tends to increase <em>S</em>.</p>

CC BY-SA 4.0
2019-02-11T09:15:00.897Z
Can you comment on short vs long term effect? Especially with regard to my last sentence?
Frank Rem
CC BY-SA 4.0
2019-02-11T11:21:46.570Z
@FrankRem Reversal/unwinding effects are hard to foretell, more so in the long term. But if buying *C* causes enough increase in *S*, then exercising in-the-money Calls at expiry cannot push *S* down: to the extent that the seller of these options shall honor its obligation, the demand of *S* is non-decreasing. If buying *P* brings *S* down, the effect (on *S*) of exercising ITM Puts at expiry may depend on whether the options buyer owns stock to deliver them when exercising his Puts. Subsequent reversals and/or contagions depend on the new stockowner's pace & timing for transacting *S*.
Iñaki Viggers
CC BY-SA 4.0
2019-02-04T21:23:48.183Z
2019-02-04T21:23:48.183Z
Iñaki Viggers
<p>How credible is the suggestion that specific parties distort price discovery (<em>rig</em> the market) of a given asset by buying/selling corresponding futures contracts or any other derivatives.</p>

<p>Should these position not unwind at some point causing a reversal effect?</p>

<financial-markets>
Can futures buying/selling distort price discovery?
Frank Rem
# Can futures buying/selling distort price discovery?

(Asked by: username_0 on 2019-02-04)

How credible is the suggestion that specific parties distort price discovery (*rig* the market) of a given asset by buying/selling corresponding futures contracts or any other derivatives.

Should these position not unwind at some point causing a reversal effect?

**Tags:** financial-markets

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## 1 answers

### Answer by username_1 on 2019-02-04. Score: 1 | Accepted answer

> Can futures buying/selling distort price discovery?

Yes, that is plausible although will not necessarily be the case. I will focus on put & call options.

Consider the [put-call parity](https://en.wikipedia.org/wiki/Put%E2%80%93call_parity), which I rewrite as

$$S+P=C+K\*exp(-rt)$$

where *S* denotes the stock [price], *P* put, *C* call, and *K* the strike price.

Buying enough call options will increase *C*. If that were the only change in the market (regarding this stock), that would "break" the put-call parity and therefore an arbitrage opportunity would ensue.

Since K is fixed, the only possible changes to offset *C*'s increase are an increase of *P* and/or of *S*. An agent who notices *C* going up is likely to interpret that someone else has information in the sense that *S* will go up.

Unless that agent also has information in the opposite direction, it would be irrational for him to buy *P* in his attempt to take advantage of the arbitrage opportunity. Thus, he is likelier to buy *S* instead of *P* at least while the put-call parity is restored. Buying *S* tends increase its price (as is the case with *any* financial instrument).

Similarly, in the event of *C*'s increase, the agent might set up a strategy that consists of taking a short position on *C* and hedge it by taking a long position on *S* (he might have to borrow because *C*<*S*, but that is irrelevant to the point). Opening that long position tends to increase *S*.

> **Comments:**
> **username_0**: Can you comment on short vs long term effect? Especially with regard to my last sentence?  
> **username_1**: @FrankRem Reversal/unwinding effects are hard to foretell, more so in the long term. But if buying *C* causes enough increase in *S*, then exercising in-the-money Calls at expiry cannot push *S* down: to the extent that the seller of these options shall honor its obligation, the demand of *S* is non-decreasing. If buying *P* brings *S* down, the effect (on *S*) of exercising ITM Puts at expiry may depend on whether the options buyer owns stock to deliver them when exercising his Puts. Subsequent reversals and/or contagions depend on the new stockowner's pace & timing for transacting *S*.  

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