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

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.