Did the good guys lose?: heterogeneous traders and regulatory restrictions on dual trading

We study the effect of restrictions on dual trading in futures contracts. Previous studies have found that dual trading restrictions can have a positive, negative, or neutral effect on market liquidity. In this paper, we propose that trader heterogeneity may explain these conflicting results. We find that, for contracts affected by restrictions, the change in market activity following restrictions differs between contracts. More important, the effect of a restriction varies among dual traders in the same market. For example, dual traders who ceased trading the S&P 500 index futures following restrictions had the highest personal trading skills prior to restrictions. However, realized bid-ask spreads for customers did not increase following restrictions. Our results imply that securities regulation may adversely affect customers, but in ways not captured by broad-based liquidity measures, such as the bid-ask spread.