The Effects of Institutional Risk Control on Trader Behavior

15 Pages Posted: 9 Dec 2015

See all articles by Ryan Garvey

Ryan Garvey

Duquesne University

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: December 3, 2015

Abstract

We examine how institutional risk control mechanisms influence proprietary stock trader behavior. When traders are forced to liquidate their inventory at a pre-designated time, they often hold onto their losing trades until the very last moment. We find that the difference between losing and winning round-trip holding times systematically widens leading up to an inventory liquidation deadline and trading becomes less driven by trading practices and more induced by the firm’s control mechanism as the deadline draws near. When trade price is heavily controlled yet trade size isn’t, we find that the difference between losing and winning roundtrip holding times systematically widens with trade size. This result suggests traders increase their risk-taking in areas where institutional control mechanisms are weaker. Our findings highlight the difficult balancing act firms face with getting market professionals to realize their losses without impeding their trading strategies.

Suggested Citation

Garvey, Ryan and Wu, Fei, The Effects of Institutional Risk Control on Trader Behavior (December 3, 2015). Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 18, No. 2, 2008, Available at SSRN: https://ssrn.com/abstract=2698619

Ryan Garvey (Contact Author)

Duquesne University ( email )

600 Forbes Avenue
Pittsburgh, PA 15282
United States

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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