Pre-Trade Hedging: Evidence from the Issuance of Retail Structured Products

We find evidence consistent with previously unrecognized market manipulation by broker-dealers. Specifically, we show that pre-trade hedging, which is distinct from front-running, alters prices at which derivative trades occur. We document that this behavior is intentional by exploiting variation in the design of structured equity products (SEPs). We find positive abnormal returns on the SEP pricing dates for which the issuer benefits from altering closing stock prices, but no such returns on pricing dates of otherwise similar SEPs. We also show large-buy trades near close of trading are more frequent when SEP issuers have incentives to alter closing stock prices.