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Trader networks and options risk management

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  • Naomi Boyd
  • Peter Locke
  • Li Sun

Abstract

We examine the effect of trading partner concentration and a matrix of variables which dictate the relative importance of a trader to the network on a set of large member proprietary traders’ risk. An increased closeness centrality and concentration of trading among network partners are found to reduce price, volatility and rebalancing risk. We further explore the nature of trading concentration established through traders’ recurring trading relationships to find that trading with an established and small network has a positive, yet costly, effect on inventory management. Relationships among market makers are important to managing their portfolio of risk.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:7:p:1031-1048
    DOI: 10.1002/fut.22117
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    References listed on IDEAS

    as
    1. Ana Babus & Péter Kondor, 2018. "Trading and Information Diffusion in Over‐the‐Counter Markets," Econometrica, Econometric Society, vol. 86(5), pages 1727-1769, September.
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    7. Artem Neklyudov, 2019. "Bid-Ask Spreads and the Over-the-Counter Interdealer Markets: Core and Peripheral Dealers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 57-84, July.
    8. Naomi Boyd, 2015. "Market making and risk management in options markets," Review of Derivatives Research, Springer, vol. 18(1), pages 1-27, April.
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