To Squeeze or Not to Squeeze? That Is No Longer the Question

This paper provides an investigation into an anomaly called a short squeeze, in the CBOT T-Bonds Futures Market, for the period spanning January 1985 to December 2014. A short squeeze occurs when market manipulations cause the cheapest-to-deliver bond to be in short supply, resulting in significant price distortions. The incentive for market manipulation, or squeeze potential, is evaluated over the last 30 years and is related to documented episodes of the CBOT futures market. It is observed that conditions are presently very favorable to the occurrence of short squeezes, and that shortages would imply large losses for short traders. We also find that the incentive for market manipulation would be significantly reduced by lowering the notional underlying security coupon rate. (c) 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:647-670, 2016