What are the issues on short squeezes?
In the commodity markets area, a major concern is the short squeeze”, where a manipulator knows the amount of physical goods which can possibly show up for delivery and buys futures contracts worth more than this floating stock (he often tries to also buy the physical goods to reduce the floating stock. This is another sense in which India’s cash market” for equity is actually a futures market we have seen short squeezes taking place on the weekly futures market. However, with cash settled derivatives (e.g. index-based contracts), this style of manipulation is not a threat. This is a very important difference between the traditional reasoning employed in the context of futures markets. Between 1874 (when the CBOT first started supplying the counterparty guarantee) and the early 1980s (when cash settlement first appeared), the history of futures markets has been pockmarked with short squeezes. It is very important to observe that as India moves into futures markets with the most modern
