Pre-Trade Hedging: Evidence from the Issuance of Retail Structured Products

66 Pages Posted: 10 Nov 2017 Last revised: 8 Feb 2019

See all articles by Brian J. Henderson

Brian J. Henderson

George Washington University - Department of Finance

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Li Wang

Case Western Reserve University

Date Written: February 6, 2019

Abstract

We find evidence consistent with previously unrecognized market manipulation by broker-dealers. Specifically, we show that pre-trade hedging, which is distinct from front-running, alters prices at which derivative trades occur. We document that this behavior is intentional by exploiting variation in the design of structured equity products (SEPs). We find positive abnormal returns on the SEP pricing dates for which the issuer benefits from altering closing stock prices, but no such returns on pricing dates of otherwise similar SEPs. We also show large-buy trades near close of trading are more frequent when SEP issuers have incentives to alter closing stock prices.

Keywords: Market manipulation, structured equity products, equity-linked securities, delta hedging, pre-trade hedging, price impact

JEL Classification: G13, G14, G23

Suggested Citation

Henderson, Brian Joseph and Pearson, Neil D. and Wang, Li, Pre-Trade Hedging: Evidence from the Issuance of Retail Structured Products (February 6, 2019). Available at SSRN: https://ssrn.com/abstract=3068903 or http://dx.doi.org/10.2139/ssrn.3068903

Brian Joseph Henderson

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Li Wang (Contact Author)

Case Western Reserve University ( email )

Weatherhead School of Management,
Case Western Reserve University
Cleveland, OH 44106
United States

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