TRADER EXPLOITATION OF ORDER FLOW INFORMATION DURING THE LTCM CRISIS

Fang Cai

Journal of Financial Research, 2009, vol. 32, issue 3, 261-284

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.

Date: 2009
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