Do Brokers Misallocate Customer Trades? Evidence From Futures Markets
In the context of futures markets, we study whether brokers allocate more favorable trades to their own accounts, and less favorable trades to their customers. We find that, within a thirty minute trading bracket, brokers on average buy at a lower price and sell at a higher price for their own accounts relative to their customers. We show evidence that brokers' price advantage may be compensation for providing liquidity to the market when brokers trade for their own accounts, but no evidence that they are due to brokers' superior information, or to greater effort by brokers when trading for themselves. Consistent with the idea that, in a competitive market for brokerage services, brokers may pass on some of their profits to customers, we find that brokers who trade for themselves also provide superior execution for their customers, relative to brokers who do not trade for themselves.
|Date of creation:||26 Jan 1998|
|Date of revision:|
|Note:||Type of Document - pdf; prepared on PC; to print on HP Laserjet; pages: 41. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 98-01. For a complete list of OFOR working papers see|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Holden, Craig W & Subrahmanyam, Avanidhar, 1992. " Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-70, March.
- Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
- Sarkar Asani, 1995. "Dual Trading: Winners, Losers, and Market Impact," Journal of Financial Intermediation, Elsevier, vol. 4(1), pages 77-93, January.
- Silber, William L, 1984. " Marketmaker Behavior in an Auction Market: An Analysis of Scalpers in Futures Markets," Journal of Finance, American Finance Association, vol. 39(4), pages 937-53, September.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- Peter R. Locke & Asani Sarkar, 1996. "Volatility and liquidity in futures markets," Research Paper 9612, Federal Reserve Bank of New York.
- Eric C. Chang & Peter R. Locke & Steven C. Mann, 1994. "The effect of CME rule 552 on dual traders," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(4), pages 493-510, 06.
- Christie William G. & Huang Roger D., 1994. "Market Structures and Liquidity: A Transactions Data Study of Exchange Listings," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 300-326, June.
- Gregory J. Kuserk & Peter R. Locke, 1993. "Scalper behavior in futures markets: An empirical examination," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(4), pages 409-431, 06.
- 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.
- Demsetz, Harold, 1997. "Limit orders and the alleged Nasdaq collusion," Journal of Financial Economics, Elsevier, vol. 45(1), pages 91-95, July.
- Sanford J. Grossman, . "An Economic Analysis of Dual Trading," Rodney L. White Center for Financial Research Working Papers 33-89, Wharton School Rodney L. White Center for Financial Research.
- Manaster, Steven & Mann, Steven C, 1996. "Life in the Pits: Competitive Market Making and Inventory Control," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 953-75.
- Working, Holbrook, 1967. "Tests of a Theory Concerning Floor Trading on Commodity Exchanges," Food Research Institute Studies, Stanford University, Food Research Institute.
- Michael J. Walsh & Stephen J. Dinehart, 1991. "Dual trading and futures market liquidity: An analysis of three chicago board of trade contract markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(5), pages 519-537, October.
- Roell, Ailsa, 1990. "Dual-capacity trading and the quality of the market," Journal of Financial Intermediation, Elsevier, vol. 1(2), pages 105-124, June.
- Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:9801002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.