Price Manipulation in Parallel Markets with Different Transparency*

Where Does Price Discovery Occur in FX Markets?

“…For example, Naik and Yadav (2003) …nd that dealers in U.K. government bond markets make signi…cant directional bets by holding futures contracts to hedge changes in their spot exposure. Drudi and Massa (2005) illustrate how informed traders may adjust their usual trading practices in order to exploit their informational advantage in less transparent markets. Dealing banks, participating in the Italian Treasury bond market, are found to exploit private information by simultaneously trading in both primary and secondary markets.…”

“…Drudi and Massa (2005) illustrate how informed dealers in the Italian treasury bond market simultaneously place orders in primary and secondary markets in order to take advantage of di¤erences in transparency in the two markets. Findings in this paper suggest that FX traders are not able to exploit private information obtained in one market across markets through their various trading strategies.…”

Trade disclosure and price dispersion

“…The stylized facts generated by our model are in accord with this evidence. Similarly, the empirical investigation of the Italian Treasury bond primary and secondary markets, reported in Drudi and Massa (2005), shows that informed dealers may refrain from trading in the more transparent market in order to exploit their informational advantage in the less transparent one, or they may use the more transparent market in order to manipulate prices.…”

The Pricing of the Option Implicitly Granted by the Italian Treasury to the Specialists in the Reserved Auction Reopening

“…Drudi and Massa (2005) show that informed dealers act strategically on the primary and secondary Italian GS markets.…”

“…I put forward, as possible explanations, either an intrinsic lack of the model, or, when these days correspond to auction dates, price manipulation by strategic market makers as in Drudi and Massa (2005). The analysis of the model residuals does not accept the hypothesis of a severe lack of the model in fitting the data, and only partially explains the 5 BTPs are auctioned through marginal (or uniform price) auction system, see below for further details.…”