Interdealer Inference and Price Discovery

Abstract

We investigate futures dealers in terms of their price relationships. We estimate a vector error correction model for dealer proprietary prices, examining the resulting information shares and common factors. More active dealers are significant price leaders, with only 1/5 of the traders responsible for a significantly higher degree of price discovery. Price leadership is more significant in both volatile and falling markets, when information is perhaps more valuable. We also find that most active floor traders generally trade at the same time and in the same direction.

Keywords: Market Maker, Dealer Interaction, Order Flow, Price Discovery

JEL Classification: G12, G14