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on Market Microstructure |
| By: | Michael Fleming; Giang Nguyen |
| Abstract: | This paper studies the workup protocol, a unique trading feature in the U.S. Treasury securities market that resembles a mechanism for discovering dark liquidity. We quantify its role in the price formation process in a model of the dynamics of price and segmented order flow induced by the protocol. We find that the dark liquidity pool generally contains less information than its transparent counterpart, but that its role is not trivial. We also show that workups are used more often around volatile times, but that their information role becomes relatively less important at those times compared to that of pre-workup trades. Higher usage of workups is also associated with higher market depth, lower bid-ask spreads, and higher trading intensity. Collectively, the evidence suggests that workups tend to be used more as a channel for liquidity providers to guard against adverse price movements than as a channel to hide private information. |
| Keywords: | Government securities ; Stock - Prices ; Treasury bonds ; Liquidity (Economics) |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:624&r=mst |
| By: | Hai-Chuan Xu; Wei Zhang; Yi-Fang Liu |
| Abstract: | In this paper, we study the dynamics of absolute return, trading volume and bid-ask spread after the trading halts using high-frequency data from the Shanghai Stock Exchange. We deal with all three types of trading halts, namely intraday halts, one-day halts and inter-day halts, of 203 stocks in Shanghai Stock Exchange from August 2009 to August 2011. We find that absolute return, trading volume, and in case of bid-ask spread around intraday halts share the same pattern with a sharp peak and a power law relaxation after that. While for different types of trading halts, the peaks' height and the relaxation exponents are different. From the perspective of halt reasons or halt duration, the relaxation exponents of absolute return after inter-day halts are larger than that after intraday halts and one-day halts, which implies that inter-day halts are most effective. From the perspective of price trends, the relaxation exponents of excess absolute return and excess volume for positive events are larger than that for negative events in case of intraday halts and one-day halts, implying that positive events are more effective than negative events for intraday halts and one-day halts. In contrast, negative events are more effective than positive events for inter-day halts. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.1138&r=mst |
| By: | Lena Korber; Oliver Linton (Institute for Fiscal Studies and Cambridge University); Michael Vogt |
| Abstract: | We investigate the effects of fragmentation in equity trading on the quality of the trading outcomes, specifically volatility, liquidity and volume. We use panel regression methods on a weekly dataset following the FTSE350 stocks over the period 2008-2011, which provides a lot of cross-sectional and time series variation in fragmentation. This period coincided with a great deal of turbulence in the UK equity markets which had multiple causes that need to be controlled for. To achieve this, we use a version of the common correlated effects estimator (Pesaran, 2006). One finding is that volatility is lower in a fragmented market when compared to a monopoly. Trading volume at the London Stock Exchange is lower too, but global trading volume is higher if order flow is fragmented across multiple venues. When separating overall fragmentation into visible fragmentation and dark reading, we find that the decline in LSE volume can be attributed to visible fragmentation, while the increase in global volume is due to dark trading. |
| Keywords: | Heterogeneous panel data, quantile regression, MiFID |
| JEL: | C23 G28 L10 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:42/13&r=mst |
| By: | Radovan Parrák (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | In this paper we compared two distinct volatility forecasting approaches. GARCH models were contrasted to the models which modelled proxies of volatility directly. More precisely, focus was put on the economic valuation of forecasting accuracy of one-day-ahead volatility forecasts. Profits from trading of one-day at-the-money straddles on the hypothetical (artificial) market were used for assessing the relative volatility forecasting accuracy. Our contribution lies in developing a novel approach to the economic valuation of the volatility forecasts - the artificial option market with a single market price – and its comparison with the established approaches. Further on, we compared the relative intra- and inter-group volatility forecasting accuracy of the competing model families. Finally, we measured the economic value of richer information provided by high-frequency data. To preview the results, we show that the economic valuation of volatility forecasts can bring a meaningful and robust ranking. Additionally, we show that this ranking is similar to the ranking implied by established statistical methods. Moreover, it was shown that modelling of volatility directly is strongly dependent on the volatility proxy in place. It was also shown, as a corollary, that the use of high frequency data to predict a future volatility is of considerable economic value. |
| Keywords: | GARCH, Realized volatility, economic loss function, volatility forecasting |
| JEL: | C58 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2013_09&r=mst |
| By: | Biais, Bruno; Hombert, Johan; Weill, Pierre-Olivier |
| Abstract: | Information collection, processing and dissemination financial institutions is challenging. This can delay the observation by traders of the exact capital charges and constraints of their institution. During this delay, traders face preference uncertainty. In this context, we study optimal trading strategies and equilibrium prices in a continuous centralized market. We focus on liquidity shocks, during which preference uncertainty is likely to matter most. Preference uncertainty generates allocative ineficiency, but need not reduce prices. Traders progressively learning about the preferences of their institution conduct round-trip trades, which generate excess volume relative to the frictionless market. In a cross section of liquidity shocks, the initial price drop is positively correlated with total trading volume. Across traders, the number of round-trips is negatively correlated with trading profits and average inventory. |
| JEL: | D8 G1 |
| Date: | 2013–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27434&r=mst |