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Interdealer trading in futures markets

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  • Peter R. Locke
  • Pattarake Sarajoti

Abstract

Trading amongst dealers on the floor of the futures exchange is examined. Since there is only one trading venue, the common floor area, trading between dealers is carried on in the presence of trades involving customer orders as well, offering a unique setting for testing the effect of inventory on dealer pricing. The findings are that these futures floor traders implicitly engage in interdealer trading as an inventory management tool. Interdealer trades are more likely to be position reducing than other trades, at higher costs than offsetting with customers. In addition, the concept of a dealer hierarchy is developed, where some floor traders, who generally are more successful, profit from their trades with other dealers. Furthermore, these more successful traders are more likely to use interdealer trading in position reducing trades, which is consistent with the existence of a dealer hierarchy. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:923–944, 2004

Suggested Citation

  • Peter R. Locke & Pattarake Sarajoti, 2004. "Interdealer trading in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(10), pages 923-944, October.
    • Handle: RePEc:wly:jfutmk:v:24:y:2004:i:10:p:923-944
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    Cited by:

    1. Naomi Boyd, 2015. "Market making and risk management in options markets," Review of Derivatives Research, Springer, vol. 18(1), pages 1-27, April.
    2. Naomi Boyd & Peter Locke & Li Sun, 2020. "Trader networks and options risk management," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1031-1048, July.

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