Do Proprietary Traders Provide Liquidity?

Nittai Bergman, Ohad Kadan, Roni Michaely and Pamela C. Moulton
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Nittai Bergman: Tel Aviv University - Berglas School of Economics
Ohad Kadan: Washington University in St. Louis - John M. Olin Business School
Pamela C. Moulton: Cornell University - SC Johnson College of Business

No 20-109, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Proprietary traders’ role in capital markets has received heightened attention with the debate over the Volcker Rule following the 2008-09 financial crisis. To date, there is little evidence on whether proprietary traders provide or take liquidity and how their behavior evolves over the business cycle. Using a unique dataset of proprietary trading activity, we show that proprietary traders concentrate their trades in a subset of stocks that are liquid to begin with. On average, proprietary traders provide liquidity in their trades, but they do so selectively, in large and liquid stocks, and when intermediary balance sheets are strong. Finally, proprietary traders do not increase their liquidity provision during periods of low returns when liquidity dries up.

Keywords: Liquidity; Proprietary Traders; Volcker Rule (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 G28 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2020-11
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp20109

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