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on Market Microstructure |
| By: | Bicchetti, David; Maystre, Nicolas |
| Abstract: | This paper analyses the intraday co-movements between returns on several commodity markets and on the stock market in the United States over the 1997-2011 period. By exploiting a new high frequency database, we compute various rolling correlations at (i) 1-hour, (ii) 5-minute, (iii) 10-second, and (iv) 1-second frequencies. Using this database, we document a synchronized structural break, characterized by a departure from zero, which starts in the course of 2008 and continues thereafter. This is consistent with the idea that recent financial innovations on commodity futures exchanges, in particular the high frequency trading activities and algorithm strategies have an impact on these correlations. |
| Keywords: | Financialization; Cross-Market Linkages; Commodities; Equities; High frequency; Structural change |
| JEL: | G14 G12 G23 O33 G13 G10 |
| Date: | 2012–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37486&r=mst |
| By: | Degryse, Hans; Van Achter, Mark; Wuyts, Gunther |
| Abstract: | We study the relation between liquidity in financial markets and post-trading fees (i.e. clearing and settlement fees). The clearing and settlement agent (CSD) faces different marginal costs for different types of transactions. Costs are lower for an internalized transaction, i.e. when buyer and seller originate from the same broker. We study two fee structures that the CSD applies to cover its costs. The first is a uniform fee on all trades (internalized and non-internalized) such that the CSD breaks even on average. Traders then maximize trading rates and higher post-trading fees increase observed liquidity in the market. The second fee structure features a CSD breaking even by charging the internalized and non-internalized trades their respective marginal cost. In this case, traders face the following trade-off: address all possible counterparties at the expense of considerable post-trading fees, or enjoy lower post-trading fees by targeting own-broker counterparties only. This difference in post-trading fees drives traders strategies and thus liquidity. Furthermore, across the two fee structures, we find that observed liquidity may differ from cum-fee liquidity (which encompasses the post-trading fees). With trade-specific fees, the cum-fee spread depends on the interacting counterparties. Next, regulators can improve welfare by imposing a particular fee structure. The optimal fee structure hinges on the magnitude of the post-trading costs. Noteworthy, a fee structure yielding higher social welfare may in fact reduce observed liquidity. Finally, we consider a number of extensions including market power for the CSD, anonymous trading and differences in broker size. |
| Keywords: | anonymity; clearing and settlement; internalization; liquidity; transaction fees |
| JEL: | G10 G15 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8765&r=mst |
| By: | Helder Sebastião (Faculty of Economics University of Coimbra and GEMF) |
| Abstract: | This paper describes the cointegration-based technologies commonly used to assess the relative price discovery across markets, namely the Hasbrouck information shares and Gonzalo-Granger long memory common factor weights, and presents a new metric denominated contemporaneous information response. These metrics are compared via simulation experiments. It is shown that, under fairly regular market conditions, the contemporaneous information response is a reliable measure of the relative incorporation of information, and in most cases is more resilient to microstructural noise than the other two metrics. |
| Keywords: | Price discovery; High frequency data; Information shares; Common factors; FTSE 100; Stock index futures; Market microstructure. |
| JEL: | G13 G14 G15 G21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2012-04&r=mst |
| By: | Pagnotta, Emiliano; Philippon, Thomas |
| Abstract: | Two forces have reshaped global securities markets in the last decade: Exchanges operate at much faster speeds and the trading landscape has become more fragmented. In order to analyze the positive and normative implications of these evolutions, we study a framework that captures (i) exchanges’ incentives to invest in faster trading technologies and (ii) investors’ trading and participation decisions. Our model predicts that regulations that protect prices will lead to fragmentation and faster trading speed. Asset prices decrease when there is intermediation competition and are further depressed by price protection. Endogenizing speed can also change the slope of asset demand curves. On normative side, we find that for a given number of exchanges, faster trading is in general socially desirable. Similarly, for a given trading speed, competition among exchange increases participation and welfare. However, when speed is endogenous, competition between exchanges is not necessarily desirable. In particular, speed can be inefficiently high. Our model sheds light on important features of the experience of European and U.S. markets since the implementation of MiFID and Reg. NMS, and provides some guidance for optimal regulations. |
| Keywords: | exchanges; high frequency; speed; trading |
| JEL: | D40 D43 D61 G12 G15 G18 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8786&r=mst |
| By: | Sait Tunc; Suleyman S. Kozat |
| Abstract: | We study optimal investment in a financial market having a finite number of assets from a signal processing perspective. We investigate how an investor should distribute capital over these assets and when he should reallocate the distribution of the funds over these assets to maximize the cumulative wealth over any investment period. In particular, we introduce a portfolio selection algorithm that maximizes the expected cumulative wealth in i.i.d. two-asset discrete-time markets where the market levies proportional transaction costs in buying and selling stocks. We achieve this using "threshold rebalanced portfolios", where trading occurs only if the portfolio breaches certain thresholds. Under the assumption that the relative price sequences have log-normal distribution from the Black-Scholes model, we evaluate the expected wealth under proportional transaction costs and find the threshold rebalanced portfolio that achieves the maximal expected cumulative wealth over any investment period. Our derivations can be readily extended to markets having more than two stocks, where these extensions are pointed out in the paper. As predicted from our derivations, we significantly improve the achieved wealth over portfolio selection algorithms from the literature on historical data sets. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1203.4156&r=mst |