An Analysis of Own Account Trading by Dual Traders in Futures Markets : A Bayesian Approach

Using audit trail transaction data compiled by the Commodity Futures Trading Commission (CFTC), we seek to ascertain directly the motives behind dual traders' own account trading and whether or not they are informed traders. We estimate our system of equations on each of the 101 most active dual traders in the data, using the Markov chain Monte Carlo (MCMC) method. We find that dual traders are informed traders who do not appear to piggyback on their customers' trades; whose own account trading reflects inventory control; and who appear to be liquidity suppliers. We also show that dual traders are heterogeneous in terms of their trading skills and other trade-related characteristics