Financial rules meant to keep markets safe are mathematically guaranteed to create loopholes for people to cheat the system.
March 17, 2026
Original Paper
An Impossibility Theorem for Price-Based Risk Constraints
SSRN · 6312700
The Takeaway
Regulators use price-based rules to measure risk and prevent volatility, but this 'impossibility theorem' proves these rules cannot be risk-sensitive and immune to manipulation at the same time. The paper demonstrates how a tiny, low-cost trade can force an institution's automated systems to trigger a massive, predictable sell-off that a manipulator can then profit from.
From the abstract
<p>Price-based risk rules map sampled transaction prices into measured risk and then into binding requirements. We prove a local impossibility theorem: in reachable binding states with sufficiently strong amplification, no such rule can simultaneously remain (i) risk-sensitive, (ii) preserve liquidity continuity, and (iii) eliminate profitable round-trip manipulation. Unlike classic manipulation, the mechanism does not require large trades, large price moves, or making a slack constraint bind. A