PRICE DESTABILIZING SPECULATION: THE ROLE OF STRATEGIC LIMIT ORDERS

Using a two-period model of a commodity market with many atomistic consumers and two strategic sellers, we show that a speculator with access to storage can lower the market-clearing price while buying and raise the market-clearing price while selling by clever use of limit, stoploss, and market orders, and profit from it. This creates price volatility even though there is no demand or supply uncertainty, and all market participants act rationally. Such speculative activity makes the strategic sellers worse off and consumers better off. As the number of strategic sellers becomes large, consumers also can be worse off.