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Conflict of Interest and Execution Quality of Futures Floor Traders : Research Paper 9611 (May 1996), Research Paper 9611

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Conflict of Interest and Execution Quality of Futures Floor Traders : Research Paper 9611 (May 1996), Research Paper 9611

DATE: October 2000

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ABSTRACT: We study the quality of customer trades executed by futures floor traders and, in particular, by dual traders (floor traders who trade both for their own accounts and for customers on the same day). In the S&P 500 futures, we show that active dual traders provide inferior execution of customer trades relative to their personal trades and relative to pure brokers, even after controlling for differences in trade size, volatility, and volume. We find that part of active dual traders’ price advantage over customers is compensation for providing liquidity when trading for their own accounts, while the remaining part is the value of observing the customer order flow. We further show that personal and customer trades (in particular, large customer trades) of active dual traders are correlated, consistent with dual traders mimicking, frontrunning, or misallocating customer trades. After a regulatory restriction on dual traders’ personal trading, dual customers receive similar execution to other customers, and there i no correlation between the personal and customer trades of dual traders.

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Sarkar, Asani and Wu, Lifan. "Conflict of Interest and Execution Quality of Futures Floor Traders : Research Paper 9611 (May 1996), Research Paper 9611," Research Papers (Federal Reserve Bank of New York) (October 2000). https://fraser.stlouisfed.org/title/6570/item/615526/content/pdf/frbny_researchpapers_9611_199605, accessed on March 22, 2023.

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NOTE: May 1996 version titled “Did the Good Guys Lose? Heterogeneous Traders and Regulatory Restrictions on Dual Trading.”

EDITION: Revised

SUBJECTS: THEMES: CLASSIFICATION:
  • lcc: HG136 .R45 no.9611
IDENTIFIERS:
  • oclc: 35121106
  • repec: fip:fednrp:9611
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