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Trader Exploitation Of Order Flow Information During The Ltcm Crisis

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  • Fang Cai

Abstract

By using a unique data set of audit trail transactions, I examine the trading behavior of market makers in the Treasury‐bond futures market during the Long‐Term Capital Management (LTCM) crisis in 1998. I find strong evidence that during the crisis market makers in the aggregate engaged in anticipatory trading against customer orders from a particular clearing firm (coded PI7) that closely match various features of LTCM's trades through Bear Stearns. I also show that a significant percentage of market makers made abnormal profits during the crisis. Their aggregate abnormal profits, however, were more than offset by abnormal losses following the recapitalization of LTCM.

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  • Fang Cai, 2009. "Trader Exploitation Of Order Flow Information During The Ltcm Crisis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(3), pages 261-284, September.
    • Handle: RePEc:bla:jfnres:v:32:y:2009:i:3:p:261-284
    DOI: 10.1111/j.1475-6803.2009.01250.x
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    3. Viktoria Dalko & Michael H. Wang, 2020. "High-frequency trading: Order-based innovation or manipulation?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 289-298, December.

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