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Keywords:

  • E44;
  • G10;
  • G14

Abstract

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.