This article was previously circulated under the title “Was There Front Running During the LTCM Crisis?” I am grateful to Douglas Skinner, Ennio Stacchetti, Lu Zheng, and especially Gautam Kaul and Tyler Shumway for their numerous insightful discussions. I have also greatly benefited from comments of Sugato Bhattacharyya, Markus Brunnermeier, Mark Carey, Joshua Coval, Raymond Fishe, Gerald Gay (the editor), Dale Henderson, Harrison Hong, Marcin Kacperczyk, Lutz Kilian, Pete Kyle, Richard Lyons, Steven Mann (the referee), Vikram Nanda, David Smith, Anjan Thakor, Leonard Zaban, and seminar participants at the Commodity Futures Trading Commission, Federal Reserve Board, Federal Reserve Bank of New York, Freddie Mac, George Mason University, Moody's KMV, University of Illinois at Chicago, University of Miami, University of Michigan, the 2002 Global Finance Association annual meeting, and the 2002 Western Finance Association annual meeting. I thank Joshua Coval and Tyler Shumway for providing the data used for this study. All remaining errors are my own. The views in this article are solely the responsibility of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System.
TRADER EXPLOITATION OF ORDER FLOW INFORMATION DURING THE LTCM CRISIS
Article first published online: 7 SEP 2009
© 2009 The Southern Finance Association and the Southwestern Finance Association
Journal of Financial Research
Volume 32, Issue 3, pages 261–284, Fall 2009
How to Cite
Cai, F. (2009), TRADER EXPLOITATION OF ORDER FLOW INFORMATION DURING THE LTCM CRISIS. Journal of Financial Research, 32: 261–284. doi: 10.1111/j.1475-6803.2009.01250.x
- Issue published online: 7 SEP 2009
- Article first published online: 7 SEP 2009
By using a unique data set of audit trail transactions, I examine the trading behavior of market makers in the Treasury-bond futures market during the Long-Term Capital Management (LTCM) crisis in 1998. I find strong evidence that during the crisis market makers in the aggregate engaged in anticipatory trading against customer orders from a particular clearing firm (coded PI7) that closely match various features of LTCM's trades through Bear Stearns. I also show that a significant percentage of market makers made abnormal profits during the crisis. Their aggregate abnormal profits, however, were more than offset by abnormal losses following the recapitalization of LTCM.