The Integrity of Closing Prices

I examine three research themes related to the potential manipulation of closing prices. First, I examine the incentives for mutual fund and hedge fund managers to inflate the closing prices of their existing holdings by trading near the close on the last trading day of key performance measurement periods, such as the end of the quarter and the end of the year. Second, I examine how other financial intermediaries reacted to a well-documented alleged manipulation in which a portfolio manager repeatedly used “bang-the-close” trades to influence the settlement prices of commodity futures contracts. Third, I examine potential manipulation of closing stock prices on equity option expiration dates. I conclude with a discussion of regulatory implications and recent market design issues.