The rules meant to keep trading safe are actually just giving traders new ways to legally rig the game.
SSRN · March 18, 2026 · 6328819
The Takeaway
Most people assume that financial regulations and risk limits make markets more stable and safe. This paper reveals that because these rules are predictable, they create a 'feedback loop' that professional traders can exploit, potentially triggering the very market crashes the rules were designed to prevent.
From the abstract
<div> <p>Under classic no-manipulation conditions on market impact, price-based risk constraints (margins, haircuts, leverage limits, volatility targets, mandates) can still generate dynamic arbitrage. We develop a refined no-dynamic-arbitrage test for such environments; it requires only the constraint rule and an estimate of market impact. The test also yields an upper bound on the size of the constrained sector consistent with non-manipulability. We apply it to volatility-managed portfolios: a