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Do Brokers Misallocate Customer Trades? Evidence From Futures Markets

Paper:ewp-fin/9801002
From:    
Date: Mon, 26 Jan 98 12:45:43 CST

Title: Do Brokers Misallocate Customer Trades? Evidence From Futures Markets
Author: Hun Y. Park (University of Illinois at Urbana-Champaign) and Asani Sarkar (Federal Reserve Bank of New York) and Lifan Wu (City University of Hong Kong)
Contact:
Comments: Type of Document - pdf; prepared on PC; to print on HP Laserjet; pages: 41. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 98-01. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
Keywords: futures, brokers, trading
JEL: G12, G13, G18
EWPA-references:
Report-no: OFOR-98-01

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.

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EconWPA began as a conversation between Bob Parks and Larry Blume on January 28, 1993. I located Paul Ginsparg's archive (then xxx.lanl.gov) and he graciously installed his software on a Sun Sparc system which was supporting the department of economics email and computation. EconWPA began accepting papers July 1, 1993 and had ftp, email, gopher and web interfaces. The web interface for submissions was engineered into existence in July 1995. A complete and catastrophic machine failure in 1999 caused the loss of EconWPA's email new paper announcment service at which time there were over 15,000 subscriptions with over 8,000 unique email addresses.

In 2005, Arts and Sciences commandeered the computing services that I had provided to the Department of Economics since 1987. Some might say that the department was sold out, others would (erroneously) claim that centralization is efficient, and still others would claim that I have few marketing skills.

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A Chinese curse states May you live in intersting times. I have. Bob Parks - Jan 2006