New Economics Papers
on Market Microstructure
Issue of 2012‒11‒11
five papers chosen by
Thanos Verousis

  1. Multiple-limit trades : empirical results, application to lead-lag measures By Fabrizio Pomponio; Frédéric Abergel
  2. Trading and liquidity with limited cognition By Pierre-Olivier Weill; Johan Hombert; Bruno Biais
  3. Modelling Trades-Through in a Limit Order Book Using Hawkes Processes By Ioane Muni Toke; Fabrizio Pomponio
  4. High quality topic extraction from business news explains abnormal financial market volatility By Ryohei Hisano; Didier Sornette; Takayuki Mizuno; Takaaki Ohnishi; Tsutomu Watanabe
  5. Public Disclosure by ‘Small’ Traders By Gelsomini, Luca

  1. By: Fabrizio Pomponio (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris); Frédéric Abergel (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris)
    Abstract: Order splitting is a standard practice in trading : traders constantly scan the limit order book and choose to limit the size of their market orders to the quantity available at the best limit, thereby controlling the market impact of their orders. In this article, we focus on the other trades, multiple-limits trades that go through the best available price in the order book, or "trade-throughs".We provide various statistics on trade-throughs: frequency, volume, intraday distribution, market impact... and present a new method for the measurement of lead-lag parameters between assets, sectors or markets.
    Keywords: Lead-lag measures, multiple-limit trades, equity futures
    Date: 2012–02–03
  2. By: Pierre-Olivier Weill (UCLA); Johan Hombert (HEC Paris); Bruno Biais (Toulouse School of Economics)
    Abstract: We study the reaction of nancial markets to aggregate liquidity shocks when traders face cognition limits. While each financial institution recovers from the shock at a random time, the trader representing the institution observes this recovery with a delay, reflecting the time it takes to collect and process information about positions, counterparties and risk exposure. Cognition limits lengthen the recovery process. They also imply that traders who find their institution has not yet recovered from the shock place market sell orders, and then progressively buy back at relatively low prices, while simultaneously placing limit orders to sell later when the price will have recovered. This generates round trip trades, which raise trading volume. We compare the case where algorithms enable traders to implement this strategy to that where traders can only place orders when they have completed their information processing task.
    Keywords: Liquidity shock, limit-orders, asset pricing
    Date: 2012
  3. By: Ioane Muni Toke (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris); Fabrizio Pomponio (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris)
    Abstract: The authors model trades-through, i.e. transactions that reach at least the second level of limit orders in an order book. Using tick-by-tick data on Euronext-traded stocks, they show that a simple bivariate Hawkes process fits nicely their empirical observations of tradesthrough. The authors show that the cross-influence of bid and ask trades-through is weak.
    Date: 2012–06–14
  4. By: Ryohei Hisano (ETH Zurich); Didier Sornette (ETH Zurich); Takayuki Mizuno (University of Tsukuba); Takaaki Ohnishi (The Canon Institute of Global Studies); Tsutomu Watanabe (The University of Tokyo)
    Abstract: Understanding the mutual relationships between information flows and social activity in society today is one of the cornerstones of the social sciences. In financial economics, the key issue in this regard is understanding and quantifying how news of all possible types (geopolitical, environmental, social, financial, economic, etc.) affect trading and the pricing of firms in organized stock markets. In this paper we seek to address this issue by performing an analysis of more than 24 million news records provided by Thompson Reuters and of their relationship with trading activity for 205 major stocks in the S&P US stock index. We show that the whole landscape of news that affect stock price movements can be automatically summarized via simple regularized regressions between trading activity and news information pieces decomposed, with the help of simple topic modeling techniques, into their “thematic†features. Using these methods, we are able to estimate and quantify the impacts of news on trading. We introduce network-based visualization techniques to represent the whole landscape of news information associated with a basket of stocks. The examination of the words that are representative of the topic distributions confirms that our method is able to extract the significant pieces of information influencing the stock market. Our results show that one of the most puzzling stylized fact in financial economies, namely that at certain times trading volumes appear to be“abnormally large,â€can be explained by the flow of news. In this sense, our results prove that there is no“excess trading,â€if the news are genuinely novel and provide relevant financial information
    Date: 2012–10
  5. By: Gelsomini, Luca (IESEG School of Management (LEM CNRS); CRETA, University of Warwick)
    Abstract: We model strategic trading by a rent-seeking insider, who exchanges without being spotted, and propose a comprehensive theory of market non-anonymity. Several novel results are established. They depend on asset value proprieties, beliefs, inter-temporal choices, and investors’ characteristics. In equilibrium, under a regulation mandating public trade revelation, disclosures may shift prices. If they do, uninformed manipulations arise only in some instances. Speci…cally, insiders constrained on asset holdings earn more than they would without such a disclosure rule. Consequently, mandating disclosures is unnecessary, as informative trades will be revealed voluntarily. This result reveals a previously unexplored link to the literature on (uncerti…ed/non-factual)announcements. JEL classification: D82 ;G12 ;G14 ; G38
    Keywords: Mandatory vs. voluntary public disclosure ; securities regulation ; insider trading ; market manipulation.
    Date: 2012

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