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Federal Reserve Bank of New York
Staff Reports
The costs and benefits of dual trading
Hun Y. Park
Asani Sarkar
Lifan Wu

This paper finds that marketmaking practices of dual traders are pit-specific. In the S&P 500 futures pit, the authors estimate that, because of a lower price impact, customers of dual traders pay eighteen cents less per contract on their trades, compared with customers of pure brokers. According to the authors' estimates, however, customers pay eleven cents more per contract for a purchase and receive nine cents less per contract for a sale, compared with the prices dual traders obtain for their own trades. Thus, the estimated net benefit of dual trading to customers in the S&P 500 futures is at least seven cents per contract, or a cash equivalent of $35 per contract. ; In the Japanese yen futures pit, dual traders also obtain superior prices on their own trades, compared with customers. But they do not provide superior execution for their customers. These differences in dual traders' behavior in the two contracts appear to be related to whether dual traders can profit from private information on their customers' order flow. In the S&P 500 futures, dual traders profit by piggybacking on their customers' trades, which does not happen in the Japanese yen futures. Finally, dual traders do not appear to be involved in frontrunning.

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Hun Y. Park & Asani Sarkar & Lifan Wu, The costs and benefits of dual trading, Federal Reserve Bank of New York, Staff Reports 2, 1995.
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Note: For a published version of this report, see Peter Locke, Asani Sarkar, and Lifan Wu, "Market Liquidity and Trader Welfare in Multiple Dealer Markets: Evidence from Dual Trading Restrictions," Journal of Financial and Quantitative Analysis 34, no. 1 (March 1999): 57-88.
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Subject headings:
Keywords: Futures; Yen; Japanese; Securities
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