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On the Nature of Trading: Do Speculators Leave Footprints?

20 Pages Posted: 3 Nov 2008  

William L. Silber

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 2002

Abstract

The paper describes how two types of traders, market makers and speculators, establish their positions and manage their risk exposure. We show that balance sheets are insufficient to determine whether a trader is a market maker or a speculator. On the other hand, trading records describing the evolution of a position over time can identify what trading strategy was pursued. Knowing the trading strategy helps to evaluate contract compliance, risk exposure, and capital requirements of trading firms. Understanding and verifying trader behavior is especially important because leveraged trading firms, and individual traders, have traditional incentives to mask their risk-taking activities. Without proper monitoring, traders can substitute risky speculation for less risky market making to reap potential payoffs.

Suggested Citation

Silber, William L., On the Nature of Trading: Do Speculators Leave Footprints? (August 2002). NYU Working Paper No. FIN-02-021. Available at SSRN: https://ssrn.com/abstract=1294199

William L. Silber (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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