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Pre-trade hedging: Evidence from the issuance of retail structured products

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  • Henderson, Brian J.
  • Pearson, Neil D.
  • Wang, Li

Abstract

We find evidence consistent with previously unrecognized market manipulation by broker-dealers. Specifically, we show that pre-trade hedging, which is distinct from front-running, alters prices at which derivative trades occur. We show this behavior is intentional by exploiting variation in the design of structured equity products (SEPs). We find positive abnormal returns on SEP pricing dates for which issuers benefit from altering closing stock prices but no such returns on pricing dates of otherwise similar SEPs. We also show that large buy trades near the close of trading are more frequent when SEP issuers have incentives to alter closing stock prices.

Suggested Citation

  • Henderson, Brian J. & Pearson, Neil D. & Wang, Li, 2020. "Pre-trade hedging: Evidence from the issuance of retail structured products," Journal of Financial Economics, Elsevier, vol. 137(1), pages 108-128.
    • Handle: RePEc:eee:jfinec:v:137:y:2020:i:1:p:108-128
    DOI: 10.1016/j.jfineco.2020.02.004
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    More about this item

    Keywords

    Market manipulation; Structured equity products; Equity-linked securities; Delta hedging; Pre-trade hedging; Price impact;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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