Do Brokers Misallocate Customer Trades? Evidence from Futures Markets

Park, Hun Y.; Sarkar, Asani; Wu, Lifan

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Description

Title

Do Brokers Misallocate Customer Trades? Evidence from Futures Markets

Author(s)

• Park, Hun Y.
• Sarkar, Asani
• Wu, Lifan

Issue Date

1998-01

Keyword(s)

brokerage services

Abstract

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.

Publisher

Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign

Series/Report Name or Number

OFOR Working Paper Series, no. 98-01

Type of Resource

text

Language

en

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http://hdl.handle.net/2142/4055

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