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Dealer Trading at the Fix

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  • Carol Osler

    (Brandeis University)

Abstract

This paper analyzes dealer trading at 'fixes,' which are benchmark financial prices set at specific times of day. Extreme returns and quick retracements are common around fixes and often prompt suspicions of collusion and market manipulation, but the connections between price dynamics and dealer behavior are poorly understood. I examine a model of trading at the fix in which dealers can engage in three prohibited behaviors: front-running, sharing information about customer orders, and colluding. The model shows that dealers will engage a strategy akin to front-running regardless of whether they compete or collude, causing quick retracements after the fix. Collusion shuts down free-riding among dealers while information sharing intensifies it. Therefore collusion intensifies, and information-sharing reduces, pre-fix volatility, post-fix retracements, and the convexity of the pre-fix price path.

Suggested Citation

  • Carol Osler, 2016. "Dealer Trading at the Fix," Working Papers 101, Brandeis University, Department of Economics and International Business School.
    • Handle: RePEc:brd:wpaper:101
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP101.pdf
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    References listed on IDEAS

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    Cited by:

    1. Duffie, Darrell & Dworczak, Piotr, 2021. "Robust benchmark design," Journal of Financial Economics, Elsevier, vol. 142(2), pages 775-802.

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