Quote-Based Manipulation of Illiquid Benchmarks

Abstract

We document a form of marking the close committed without transacting. Instead, manipulators utilize periods of order-book illiquidity to inflate the benchmark price. We find instances of closing price manipulation are associated with increases in end of day returns and, contrary to findings in the previous literature, observe no subsequent price reversals. Instead, we show these price effects continue in the manipulated direction over extended periods, with average excess returns of over 80% in the six-months following the manipulation. Our results demonstrate that both regulators and exchanges need to be mindful of the pressures of external incentives on benchmark prices.