Life in the Pits: Competitive Market Making and Inventory Control

Do Behavioral Biases Affect Prices?

“…This assumption is supported by the evidence of Kolb (1991), Kuserk and Locke (1993), and Manaster and Mann (1996) and has been used previously in Manaster and Mann (1996) and Coval and Shumway (2000).…”

“…As Manaster and Mann (1996) point out, since traders carry little overnight informational advantage, substantial overnight margin funding costs typically discourage them from carrying overnight positions. Of course, some noise will be present in our calculations to the extent that traders close out positions during evening trading sessions, hedge their positions using options contracts, 11 or place their trades through other locals.…”

“…11 Though, as Manaster and Mann (1996) note, such activity is rare. 12 Overall, on about 65 percent of our trader-day observations, the trader appears to Þnish the day trading session with an absolute inventory of 10 contracts or less.…”

Liquidity in the Futures Pits: Inferring Market Dynamics with Incomplete Data

“…They are essentially the computerized trade reconstruction (CTR) data used by Manaster andMann (1996), Ferguson, Mann, andSchneck (1998) and others, with trader identifications suppressed. Because the CTR data are constructed from clearing records, there are not likely to be many spurious or omitted trades.…”

“…Other useful introductory materials include: Gilks, Richardson, and Spiegelhalter (1996) (for a concise overview of MCMC techniques), Casella and George (1992) (for the Gibbs sampler) and Chib and Greenberg (1996) (for applications in econometrics). Mann (1996) and Locke and Venkatesh (1997) use Computerized Trade Reconstruction (CTR) data. These data (which are not publicly available) establish trader identity, permit tracking of trader positions, and so support a range of interesting analyses concerning inventory control.…”