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Do Proprietary Traders Provide Liquidity?

Author

Listed:
  • Nittai Bergman

    (Tel Aviv University - Berglas School of Economics)

  • Ohad Kadan

    (Washington University in St. Louis - John M. Olin Business School)

  • Roni Michaely

    (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute)

  • Pamela C. Moulton

    (Cornell University - SC Johnson College of Business)

Abstract

Proprietary traders’ role in capital markets has received heightened attention with the debate over the Volcker Rule following the 2008-09 financial crisis. To date, there is little evidence on whether proprietary traders provide or take liquidity and how their behavior evolves over the business cycle. Using a unique dataset of proprietary trading activity, we show that proprietary traders concentrate their trades in a subset of stocks that are liquid to begin with. On average, proprietary traders provide liquidity in their trades, but they do so selectively, in large and liquid stocks, and when intermediary balance sheets are strong. Finally, proprietary traders do not increase their liquidity provision during periods of low returns when liquidity dries up.

Suggested Citation

  • Nittai Bergman & Ohad Kadan & Roni Michaely & Pamela C. Moulton, 2020. "Do Proprietary Traders Provide Liquidity?," Swiss Finance Institute Research Paper Series 20-109, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp20109
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    More about this item

    Keywords

    Liquidity; Proprietary Traders; Volcker Rule;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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