Abstract
This paper corrects the bias in the method by Manaster and Mann (1996) and Coval and Shumway (2001) in testing for trade execution skill by professional floor traders. An analysis of transaction data from four commodity markets at the Chicago Mercantile Exchange finds no evidence that proprietary traders make price concessions in adjusting their inventory, which contradicts pure inventory models but is consistent with the information models of market makers. Furthermore, limited evidences are found that dual trading has a positive effect on a trader’s execution skill as predicted by Fishman and Longstaff (1992).
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