|
on Market Microstructure |
| By: | Galati, Luca |
| Abstract: | This paper examines the impact of zero fees on market quality. I examine this issue using a natural experiment in Bitcoin provided by the Binance exchange, which eliminated maker-taker trading fees for market participants in July 2022. I find that while zero fees increase investors' willingness to trade, thereby \textit{prima facie} increasing liquidity, such fees' elimination encourages market makers to widen the bid-ask spread and provide a shallower market depth, which in turn reduces liquidity. Liquidity providers realise gains at the expense of liquidity takers, suggesting the emergence of new forms of financial market misconduct. Notably, despite the removal of trading fees, implicit transaction costs increased for customers. This and the boost in the exchange market share raise concerns about price integrity and investors' protection in the highly unregulated crypto environment, in turn implying that the elimination of maker-taker fees is detrimental to the market. |
| Keywords: | bitcoin market, cryptocurrency exchange, financial market misconduct, liquidity, market microstructure, zero-fee trading |
| JEL: | C58 D47 D82 G14 G18 |
| Date: | 2023–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:mol:ecsdps:esdp23091&r=mst |
| By: | Etienne Chevalier; Yadh Hafsi; Vathana Ly Vath |
| Abstract: | The primary objective of this paper is to conceive and develop a new methodology to detect notable changes in liquidity within an order-driven market. We study a market liquidity model which allows us to dynamically quantify the level of liquidity of a traded asset using its limit order book data. The proposed metric holds potential for enhancing the aggressiveness of optimal execution algorithms, minimizing market impact and transaction costs, and serving as a reliable indicator of market liquidity for market makers. As part of our approach, we employ Marked Hawkes processes to model trades-through which constitute our liquidity proxy. Subsequently, our focus lies in accurately identifying the moment when a significant increase or decrease in its intensity takes place. We consider the minimax quickest detection problem of unobservable changes in the intensity of a doubly-stochastic Poisson process. The goal is to develop a stopping rule that minimizes the robust Lorden criterion, measured in terms of the number of events until detection, for both worst-case delay and false alarm constraint. We prove our procedure's optimality in the case of a Cox process with simultaneous jumps, while considering a finite time horizon. Finally, this novel approach is empirically validated by means of real market data analyses. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.09273&r=mst |
| By: | Enrichetta Ravina |
| Abstract: | Using a large panel of U.S. brokerage accounts trades and positions, we show that a large fraction of retail investors trade as contrarians after large earnings surprises, especially for loser stocks, and that such contrarian trading contributes to post earnings announcement drift (PEAD) and price momentum. Indeed, when we double-sort by momentum portfolios and retail trading flows, PEAD and momentum are only present in the top two quintiles of retail trading intensity. Finer sorts confirm the results, as do sorts by firm size and institutional ownership level. We show that the investors in our sample are representative of the universe of U.S. retail traders, and that the magnitude of the phenomena we describe indicate a quantitively substantial role of retail investors in generating momentum. Alternative hypotheses, such as the disposition effect and stale limit orders, do not explain retail contrarian trading. Younger traders are more likely to be contrarian, and a firm’s dividend yield, leverage, size, book to market, and analyst coverage are associated with the fraction of contrarian trades they face around earnings announcements. Attentive investors are more likely to be contrarians. |
| Keywords: | Retail; Momentum; Contrarian |
| JEL: | G40 G50 G11 |
| Date: | 2023–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:96974&r=mst |
| By: | Jason Allen; Milena Wittwer |
| Abstract: | We examine how intermediary capitalization affects asset prices in a framework that allows for intermediary market power. We introduce a model in which capital-constrained intermediaries buy or trade an asset in an imperfectly competitive market, and we show that weaker capital constraints lead to both higher prices and intermediary markups. In exchange markets, this results in reduced market liquidity, while in primary markets it leads to higher auction revenues at an implicit cost of larger price distortion. Using data from Canadian Treasury auctions, we demonstrate how our framework can quantify these effects by linking asset demand to individual intermediaries’ balance sheet information. |
| Keywords: | Financial institutions; Market structure and pricing |
| JEL: | G18 G20 D40 D44 L10 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-51&r=mst |
| By: | Michael J. Fleming |
| Abstract: | In a 2022 post, we showed how liquidity conditions in the U.S. Treasury securities market had worsened as supply disruptions, high inflation, and geopolitical conflict increased uncertainty about the expected path of interest rates. In this post, we revisit some commonly used metrics to assess how market liquidity has evolved since. We find that liquidity worsened abruptly In March 2023 after the failures of Silicon Valley Bank and Signature Bank, but then quickly improved to levels close to those of the preceding year. As in 2022, liquidity in 2023 continues to closely track the level that would be expected by the path of interest rate volatility. |
| Keywords: | liquidity; Treasury Market; volatility |
| JEL: | G1 |
| Date: | 2023–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97163&r=mst |
| By: | Li, Shasha; Yang, Biao |
| Abstract: | We investigate how optimal attention allocation of green-motivated investors changes information asymmetry in financial markets and thus affects firms' financing costs. To guide our empirical analysis, we propose a model where investors with heterogeneous green preferences endogenously allocate limited attention to learn market-level or firm-specific fundamental shocks. We find that a higher fraction of green investors in the market leads to higher aggregate attention to green firms. This reduces the information asymmetry of green firms, leading to higher price informativeness and lower leverage. Moreover, the information asymmetry of brown firms and the market increases with the share of green investors. Therefore, greater green attention is associated with less market efficiency. We provide empirical evidence to support our model predictions using U.S. data. Our paper shows how the growing demand for sustainable investing shifts investors' attention and benefits eco-friendly firms. |
| Keywords: | capital structure, climate finance, information asymmetry, rational in-attention |
| JEL: | D82 G11 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:202023&r=mst |