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

31 Pages Posted: 20 Jul 2002

See all articles by Kai Li

Kai Li

University of British Columbia (UBC) - Sauder School of Business; Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR); European Corporate Governance Institute (ECGI); Canadian Sustainable Finance Network (CSFN)

Sugato Chakravarty

Multiple version iconThere are 2 versions of this paper

Date Written: May 2002

Abstract

Using proprietary audit trail transaction data 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 an absence of any trade timing by dual traders in relation to the execution of their customers' orders. Further examination employing correlation statistics and time series regressions provides strong support for the proposition that dual traders supply liquidity and actively manage inventory. Even after simultaneously controlling for factors representing information, liquidity supply and inventory control, within a multivariate regression framework, liquidity supply and inventory control remain as the determinants of dual traders' personal trades. Overall, the emergent profile of a dual trader is that of an uninformed trader performing complimentary tasks of liquidity provision and personal inventory management. These results survive extensive robustness checks, question the assumptions underpinning the extant theoretical research and have important policy implications.

Keywords: dual trading, front running, informed trader, inventory, liquidity

JEL Classification: G20, G28

Suggested Citation

Li, Kai and Chakravarty, Sugato, An Examination of Own Account Trading by Dual Traders in Futures Markets (May 2002). Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=316573 or http://dx.doi.org/10.2139/ssrn.316573

Kai Li

University of British Columbia (UBC) - Sauder School of Business ( email )

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China Academy of Financial Research (CAFR)

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Canadian Sustainable Finance Network (CSFN) ( email )

Queens University
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No contact information is available for Sugato Chakravarty

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