Which Types of Traders and Orders Profit from Futures Market Trading?

Abstract

The Taiwan futures exchange, which trades contracts on the TAIEX stock index, collects extensive data on each trade, including the particular type of trader (a proprietary futures trading firm, a domestic institutional investor, a foreign institutional investor, or an individual) along with the price, quantity, trade time, and whether it was a market order or limit order. The authors investigate the data for trading from 2006–2008. They categorize limit orders as aggressive (limit price above the current quote midpoint) or passive. Tests on overall profitability show that individual traders lose money to the other groups, which are all profitable. Institutional traders use more aggressive limit and market orders than passive orders, and the resulting trades are more profitable than those initiated by passive limit orders. They find greater use of aggressive order types at the beginning of the trading day by institutional traders, which is consistent with theories of optimal trading strategy for informed investors.