|
on Market Microstructure |
| By: | Konark Jain; Jean-Fran\c{c}ois Muzy; Jonathan Kochems; Emmanuel Bacry |
| Abstract: | We investigate the disparity in the microstructural properties of the Limit Order Book (LOB) across different relative tick sizes. Tick sizes not only influence the granularity of the price formation process but also affect market agents' behavior. A key contribution of this study is the identification of several stylized facts, which are used to differentiate between large, medium, and small tick stocks, along with clear metrics for their measurement. We provide cross-asset visualizations to illustrate how these attributes vary with relative tick size. Further, we propose a Hawkes Process model that accounts for sparsity, multi-tick level price moves, and the shape of the book in small-tick stocks. Through simulation studies, we demonstrate the universality of the model and identify key variables that determine whether a simulated LOB resembles a large-tick or small-tick stock. Our tests show that stylized facts like sparsity, shape, and relative returns distribution can be smoothly transitioned from a large-tick to a small-tick asset using our model. We test this model's assumptions, showcase its challenges and propose questions for further directions in this area of research. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.08744 |
| By: | Cong Zhou |
| Abstract: | This paper conducts an empirical investigation into the effects of Designated Market Makers (DMMs) on key market quality indicators, such as liquidity, bid-ask spreads, and order fulfillment ratios. Through agent-based simulations, this study explores the impact of varying competition levels and incentive structures among DMMs on market dynamics. It aims to demonstrate that DMMs are crucial for enhancing market liquidity and stabilizing price spreads, thereby affirming their essential role in promoting market efficiency. Our findings confirm the impact of the number of Designated Market Makers (DMMs) and asset diversity on market liquidity. The result also suggests that an optimal level of competition among DMMs can maximize liquidity benefits while minimizing negative impacts on price discovery. Additionally, the research indicates that the benefits of increased number of DMMs diminish beyond a certain threshold, implying that excessive incentives may not further improve market quality metrics. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.16589 |
| By: | Xing Huang; Philippe Jorion; Jeongmin Lee; Christopher Schwarz |
| Abstract: | Using 150, 000 actual trades, we study the U.S. equity retail broker-wholesaler market, focusing on brokers’ order routing and competition among wholesalers. We document substantial and persistent dispersion in execution costs across wholesalers within brokers. Despite this, many brokers hardly change their routing and even consistently send more orders to the more expensive wholesalers, although there is considerable variation among brokers. We also document a case where, after a new wholesaler enters, existing wholesalers significantly reduce their execution costs. Overall, our findings and theoretical framework highlight the heterogeneity across brokers and are inconsistent with perfect competition in this market. |
| Keywords: | Execution quality; Retail trading; Order routing; Competition; Bid/ask spread; Market microstructure; Broker-dealers |
| JEL: | G50 G12 G14 |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-80 |
| By: | Franz Ostrizek (Sciences Po); Elia Sartori (CSEF) |
| Abstract: | We investigate the behavioral foundations of informed trade. We extend the canonical (Kyle, 1989) model to allow for wide range of misperception about the information environment (e.g. overconfidence and correlation delusion) as well as the market clearing condition (e.g. understatement of individual impact) and ask when a trading equilibrium can exist. We show that existence requires either i) the market clearing rule being perceived with (cognitive) noise of arbitrary size, or ii) sufficiently strong misperceptions that lead traders to overestimate the precision of their private information (relative to that of others) or underestimate their market impact. Following i) provides a cognitive foundation for the noise trader approach, while ii) yields a highly tractable linear model of (sufficiently) biased traders. Fixing the bias, a higher number of traders is beneficial for existence, though the economy is typically discontinuous in the countable-trader limit. In the latter case, equilibrium is characterized by limit uncertainty, a property which is satisfied if and only if traders perceive some correlation in their competitors’ information. |
| Keywords: | tax compliance, enforcement, evasion, audit, disclosure, firm, bunching. |
| JEL: | D04 D22 H24 H25 H26 H32 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:730 |