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Trader networks and options risk management

Naomi Boyd, Peter Locke and Li Sun

Journal of Futures Markets, 2020, vol. 40, issue 7, 1031-1048

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.

Date: 2020
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