|
on Market Microstructure |
| By: | Pierre Collin-Dufresne (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and National Bureau of Economic Research (NBER)); Benjamin Junge (Ecole Polytechnique Fédérale de Lausanne); Anders B. Trolle (HEC Paris) |
| Abstract: | Despite a regulatory effort to promote all-to-all trading, the post-Dodd-Frank index-CDS market remains two-tiered. Dealer-to-client trades have higher transaction costs than interdealer trades. The difference is entirely explained by the higher, largely permanent, price impact of client trades. However, transaction costs of interdealer trades vary significantly across trading protocols. Mid-market matching and workup -- both characterized by execution risk -- incur the smallest costs. Dealer-to-client trades typically execute well inside the spread quoted on the interdealer limit order book. Thus, clients who value immediacy could not improve execution with marketable interdealer orders. This may explain the endurance of the two-tiered market structure. |
| Keywords: | CDX, Dodd-Frank Act, Market Structure, Transaction Costs, Swap Execution Facility, Trading Protocols, Workup |
| JEL: | G12 G13 G14 G28 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1840&r=mst |
| By: | Vincent Bogousslavsky (Boston College); Pierre Collin-Dufresne (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and National Bureau of Economic Research (NBER)); Mehmet Sağlam (University of Cincinnati) |
| Abstract: | We investigate the impact of an exogenous trading glitch at a high-frequency market-making firm on standard measures of stock liquidity (effective and realized spreads) as well as on institutional trading costs (Implementation Shortfall and VWAP slippage) obtained from a proprietary data set. We find that stocks in which the firm accumulated large positions as a result of the trading glitch become substantially more illiquid on the day of the glitch. Effective spreads revert very quickly suggesting that market liquidity is resilient. Instead, institutional trading costs remain significantly higher for more than one week. We further document that all stocks for which the firm was a designated market maker become more illiquid, even if they were not heavily traded during the glitch, in the two days prior to being reassigned to another market maker. These findings are broadly consistent with 'slow-moving capital' theories and suggest that high-frequency trading 'flash crashes' may be associated with significant costs that are difficult to detect using standard liquidity measures. |
| Keywords: | Liquidity, Algorithmic Trading, Institutional Trading Costs, Slow-Moving Capital, Market Making |
| JEL: | G10 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1841&r=mst |
| By: | Diego Agudelo; Diego Amaya; Juliana Hincapié; Julián Múnera |
| Abstract: | We investigate who trades around new releases associate with large price changes in the Colombian Stock Exchange. We take advantage of two unique datasets: a transaction database with investor ids and a database of news reported to the regulator. We identify that both informed and attention-driven traders are two distinct groups of individuals. The former tend to hold larger and more diversified portfolios and trade more actively than the latter. Individuals do most of the liquidity providing around events. We report some evidence of momentum trading by Institutions after those large price changes. No significant participation of foreign investors around the events was found. These results highlight the critical role of retail investors and the need to improve the information environment and institutions’ sophistication in a small Emerging Market. |
| Date: | 2017–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:col:000122:016359&r=mst |
| By: | Luis Carlos Garc\'ia del Molino; Iacopo Mastromatteo; Michael Benzaquen; Jean-Philippe Bouchaud |
| Abstract: | We reconsider the multivariate Kyle model in a risk-neutral setting with a single, perfectly informed rational insider and a rational competitive market maker, setting the price of $n$ correlated securities. We prove the unicity of a symmetric, positive definite solution for the impact matrix and provide insights on its interpretation. We explore its implications from the perspective of empirical market microstructure, and argue that it provides a sensible inference procedure to cure some pathologies encountered in recent attempts to calibrate cross-impact matrices. |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1806.07791&r=mst |
| By: | Xuefeng Gao; Yunhan Wang |
| Abstract: | This paper studies the profitability of market making strategies and the impact of latency on electronic market makers' profits for large-tick assets. By analyzing the optimal market making problem using Markov Decision Processes, we provide simple conditions to determine when a market maker earns zero or positive profits and discuss economic implications. We also prove that higher latency leads to reduced profits for market makers, and conduct numerical experiments to illustrate the effect of latency and relative latency on the market maker's expected profit. Finally, our work highlights the importance of value of orders in optimal market making. |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1806.05849&r=mst |