Large traders in financial markets

Large traders in financial markets care a lot about the supply of liquidity - factors that allow them to trade quickly without incurring a significant cost - since the size of their trading can cause a large market impact if they demand more liquidity than is currently available. The first study examines an important and recurring cause of liquidity shocks in futures markets - the accumulation of extreme and opposing positions by hedgers and speculators. These two classes of traders are found to differ in the impact their trades have on market prices and their response to market-relevant news and past returns. As their positions diverge sufficiently, these differences affect the number and heterogeneity of available counterparties, and can cause increased volatility, high bid-ask spreads, and return regularities. The second study examines the limits of anonymity available to largeblock traders. In addition to the trade-off between price risk and price impact that block-traders face, this paper introduces an additional, strategic, consideration: by trading with large volume for several periods, block traders risk losing their anonymity and attracting opportunistic strategic traders who want to `ride' the block traders' market impact. In simulated markets, block traders lose their anonymity under several parameter configurations and strategic traders are able to profitably exploit the knowledge of their presence. The third study examines the recent `flash crash' episodes that rose to the public's attention on May 6th, 2010, when within only a few minutes, the Dow Jones Industrial Average experienced its second largest point swing and the biggest one-day point decline in its history. This study examines whether these flash-type events which induce large intraday volatility are becoming more common since the big flash crash of May 6th. Over a $14$-month sample period around May 6th, this paper finds that there have been more flash-type events with shorter inter-flash durations since May 6th, however, survival analysis of these events does not establish the significance of these different frequencies.