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An Examination of Own Account Trading by Dual Traders in Futures Markets

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  • Chakravarty, Sugato
  • Li, Kai

Abstract

Using proprietary audit trail transactions compiled by the Commodity Futures Trading Commission, we investigate, at the individual trader level, (1) the timing and (2) the determinants of dual traders’ personal trades. Our analysis reveals a surprising absence of any trade timing by dual traders in relation to the execution of their customers’ orders. Further examination employing correlation statistics and the time series regressions provides strong support for dual traders as liquidity suppliers and for their inventory control behavior. Finally, after simultaneously controlling for factors representing information, liquidity supply and inventory control, within a multivariate regression framework, the determinants of a dual trader’s personal trading decision appear to be liquidity supply and inventory control. Overall, the emergent profile of a dual trader is that of an uninformed trader performing complimentary tasks of liquidity provision and personal inventory control. These results survive extensive robustness checks, question the assumptions underpinning the extant theoretical research and have important policy implications.

Suggested Citation

  • Chakravarty, Sugato & Li, Kai, 2001. "An Examination of Own Account Trading by Dual Traders in Futures Markets," Purdue University Economics Working Papers 1151, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1151
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    References listed on IDEAS

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    1. Takatoshi Ito & Richard K. Lyons & Michael T. Melvin, 1998. "Is There Private Information in the FX Market? The Tokyo Experiment," Journal of Finance, American Finance Association, vol. 53(3), pages 1111-1130, June.
    2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
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    4. Chang, Eric C. & Loche, Peter R., 1996. "The Performance and Market Impact of Dual Trading: CME Rule 552," Journal of Financial Intermediation, Elsevier, vol. 5(1), pages 23-48, January.
    5. Fishman, Michael J & Longstaff, Francis A, 1992. " Dual Trading in Futures Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 643-671, June.
    6. Locke, Peter R. & Sarkar, Asani & Wu, Lifan, 1999. "Market Liquidity and Trader Welfare in Multiple Dealer Markets: Evidence from Dual Trading Restrictions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 57-88, March.
    7. Chakravarty, Sugato & Li, Kai, 2003. "A Bayesian analysis of dual trader informativeness in futures markets," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 355-371, May.
    8. Roell, Ailsa, 1990. "Dual-capacity trading and the quality of the market," Journal of Financial Intermediation, Elsevier, vol. 1(2), pages 105-124, June.
    9. Ferguson, Michael F & Mann, Steven C, 2001. "Execution Costs and Their Intraday Variation in Futures Markets," The Journal of Business, University of Chicago Press, vol. 74(1), pages 125-160, January.
    10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    11. Hun Y. Park & Asani Sarkar & Lifan Wu, 1995. "The costs and benefits of dual trading," Staff Reports 2, Federal Reserve Bank of New York.
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    Citations

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    Cited by:

    1. Erenburg, Grigori & Kurov, Alexander & Lasser, Dennis J., 2006. "Trading around macroeconomic announcements: Are all traders created equal?," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 470-493, October.
    2. Chaturvedula, Chakrapani & Bang, Nupur Pavan & Rastogi, Nikhil & Kumar, Satish, 2015. "Price manipulation, front running and bulk trades: Evidence from India," Emerging Markets Review, Elsevier, vol. 23(C), pages 26-45.
    3. Menkveld, Albert J. & Sarkar, Asani & van der Wel, Michel, 2008. "Customer flow, intermediaries, and the discovery of the equilibrium riskfree rate," CFS Working Paper Series 2008/47, Center for Financial Studies (CFS).
    4. repec:eee:pacfin:v:45:y:2017:i:c:p:34-51 is not listed on IDEAS
    5. Locke, Peter & Onayev, Zhan, 2007. "Order flow, dealer profitability, and price formation," Journal of Financial Economics, Elsevier, vol. 85(3), pages 857-887, September.
    6. Albert J. Menkveld & Asani Sarkar & Michel van der Wel, 2007. "Macro News, Riskfree Rates, and the Intermediary," Tinbergen Institute Discussion Papers 07-086/2, Tinbergen Institute.
    7. Frantisek Kopriva, 2008. "Source of Information-Driven Trading on the Prague Stock Exchange," CERGE-EI Working Papers wp365, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    8. Albert J. Menkveld & Asani Sarkar & Michel Van der Wel, 2007. "Macro news, risk-free rates, and the intermediary: customer orders for thirty-year Treasury futures," Staff Reports 307, Federal Reserve Bank of New York.
    9. Michel van der Wel & Albert Menkveld & Asani Sarkar, 2009. "Are Market Makers Uninformed and Passive? Signing Trades in The Absence of Quotes," Tinbergen Institute Discussion Papers 09-046/3, Tinbergen Institute.
    10. 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.
    11. Fang Cai, 2003. "Was there front running during the LTCM crisis," International Finance Discussion Papers 758, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    dual trading ; front running ; informed trader ; inventory ; liquidity;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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