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Trader networks and options risk management

Author

Listed:
  • Naomi Boyd
  • Peter Locke
  • Li Sun

Abstract

We examine the effect of trading partner concentration and a matrix of variables which dictate the relative importance of a trader to the network on a set of large member proprietary traders’ risk. An increased closeness centrality and concentration of trading among network partners are found to reduce price, volatility and rebalancing risk. We further explore the nature of trading concentration established through traders’ recurring trading relationships to find that trading with an established and small network has a positive, yet costly, effect on inventory management. Relationships among market makers are important to managing their portfolio of risk.

Suggested Citation

  • Naomi Boyd & Peter Locke & Li Sun, 2020. "Trader networks and options risk management," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1031-1048, July.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:7:p:1031-1048
    DOI: 10.1002/fut.22117
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    References listed on IDEAS

    as
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    5. Ana Babus & Péter Kondor & Yilin Wang, 2020. "Corrigendum to “Trading and Information Diffusion in Over‐the‐Counter Markets”," Econometrica, Econometric Society, vol. 88(5), pages 2221-2228, September.
    6. Ana Babus, 2016. "The formation of financial networks," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 239-272, May.
    7. Richard Stanton & Johan Walden & Nancy Wallace, 2018. "Mortgage Loan Flow Networks and Financial Norms," The Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3595-3642.
    8. Artem Neklyudov, 2019. "Bid-Ask Spreads and the Over-the-Counter Interdealer Markets: Core and Peripheral Dealers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 57-84, July.
    9. Naomi Boyd, 2015. "Market making and risk management in options markets," Review of Derivatives Research, Springer, vol. 18(1), pages 1-27, April.
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