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on Market Microstructure |
| By: | Martin L. Scholtus (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam); Bart Frijns (Auckland University of Technology) |
| Abstract: | This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the orderbook (full orderbook). |
| Keywords: | Macroeconomic News; High Frequency Trading; Latency Costs; Market Activity; Event-Based Trading |
| JEL: | E44 G10 G14 |
| Date: | 2012–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120121&r=mst |
| By: | Alexis Fauth (SAMM - Statistique, Analyse et Modélisation Multidisciplinaire (SAmos-Marin Mersenne) - Université Paris I - Panthéon Sorbonne); Ciprian A. Tudor (LPP - Laboratoire Paul Painlevé - CNRS : UMR8524 - Université Lille 1 - Sciences et Technologies) |
| Abstract: | We introduce a new model in order to describe the fluctuation of tick-by-tick financial time series. Our model, based on marked point process, allows us to incorporate in a unique process the duration of the transaction and the corresponding volume of orders. The model is motivated by the fact that the "excitation" of the market is different in periods of time with low exchanged volume and high volume exchanged. We illustrate our result by numerical simulations on foreign exchange data sampling in millisecond. By checking the main stylized facts, we show that the model is consistent with the empirical data. We also find an interesting relation between the distribution of the volume of limited order and the volume of market orders. To conclude, we propose an application to risk management and we introduce a forecast procedure. |
| Keywords: | Order book; bid-ask spread; market impact; microstructure; multivariate marked Hawkes processes; trading strategy. |
| Date: | 2012–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00752971&r=mst |
| By: | José Manuel Corcuera (Universitat de Barcelona); Emil Hedevang (Aarhus University); Mikko S. Pakkanen (Aarhus University and CREATES); Mark Podolskij (Heidelberg University and CREATES) |
| Abstract: | This paper presents some asymptotic results for statistics of Brownian semi-stationary (BSS) processes. More precisely, we consider power variations of BSS processes, which are based on high frequency (possibly higher order) differences of the BSS model. We review the limit theory discussed in [Barndorff-Nielsen, O.E., J.M. Corcuera and M. Podolskij (2011): Multipower variation for Brownian semistationary processes. Bernoulli 17(4), 1159-1194; Barndorff-Nielsen, O.E., J.M. Corcuera and M. Podolskij (2012): Limit theorems for functionals of higher order differences of Brownian semi-stationary processes. In "Prokhorov and Contemporary Probability Theory", Springer.] and present some new connections to fractional diffusion models. We apply our probabilistic results to construct a family of estimators for the smoothness parameter of the BSS process. In this context we develop estimates with gaps, which allow to obtain a valid central limit theorem for the critical region. Finally, we apply our statistical theory to turbulence data. |
| Keywords: | Brownian semi-stationary processes, high frequency data, limit theorems, stable convergence, turbulence |
| JEL: | C10 C13 C14 |
| Date: | 2012–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2012-52&r=mst |
| By: | Alexis Fauth (SAMM); Ciprian A. Tudor (LPP) |
| Abstract: | We introduce a new model in order to describe the fluctuation of tick-by-tick financial time series. Our model, based on marked point process, allows us to incorporate in a unique process the duration of the transaction and the corresponding volume of orders. The model is motivated by the fact that the "excitation" of the market is different in periods of time with low exchanged volume and high volume exchanged. We illustrate our result by numerical simulations on foreign exchange data sampling in millisecond. By checking the main stylized facts, we show that the model is consistent with the empirical data. We also find an interesting relation between the distribution of the volume of limited order and the volume of market orders. To conclude, we propose an application to risk management and we introduce a forecast procedure. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1211.4157&r=mst |
| By: | Völker, Florian; Cremers, Heinz; Panzer, Christof |
| Abstract: | -- Most traditional Value at Risk models neglect market liquidity risk and hence only consider the market price risk (i.e. risk associated with holding a certain position). In order to fully capture the market risk associated to holding and trading a position, we first define market liquidity risk, its dimensions (tightness, depth, resiliency, immediacy) and causes (exogenous / endogenous). We then present and evaluate different liquidity-adjusted Value at Risk models which capture one or more dimensions of market liquidity risk and thereby present a more true view on the overall market risk. This paper also spotlights how Basel III regulation defines liquid assets, derived from the Liquidity Coverage Ratio (LCR) framework, and evaluates if this regulation adequately reflects market liquidity risk. We conclude that the LCR concept is flawed as the defined buckets of liquid assets do not reflect the true liquidity of certain assets. Furthermore it can be said that the defined buckets might result in heightened systematic risk as banks will focus on certain asset classes. Additionally the corporate fixed income sector might experience a crowding out as these assets will appear less rewarding to banks. |
| Keywords: | Market Risk,Market Liquidity Risk,Market Microstructure,Liquidity-adjusted Value-at-Risk,Basel III,Liquidity Coverage Ratio,Liquid Assets |
| JEL: | C1 C14 C16 D4 G1 G32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:198&r=mst |
| By: | Di Maggio, Marco; Pagano, Marco |
| Abstract: | We study a model where some investors (“hedgers”) are bad at information processing, while others (“speculators”) have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators’ trades more visible to hedgers. As a consequence, asset sellers will oppose both the disclosure of fundamentals and trading transparency. This is socially inefficient if a large fraction of market participants are speculators and hedgers have low processing costs. But in these circumstances, forbidding hedgers’ access to the market may dominate mandatory disclosure. |
| Keywords: | financial disclosure; information processing; liquidity; market transparency; rational inattention |
| JEL: | D83 D84 G18 G38 K22 M48 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9207&r=mst |
| By: | Takatoshi Ito; Kenta Yamada; Misako Takayasu; Hideki Takayasu |
| Abstract: | Using the “firm” quotes obtained from the tick-by-tick EBS (electronic broking system that is a major trading platform for foreign exchanges) data, it is found that risk-free arbitrage opportunities—free lunch—do occur in the foreign exchange markets, but it typically last only a few seconds. “Free lunch” is in the form of (a) negative spreads in a currency pair and (b) triangular arbitrage relationship involving three currency pairs. The latter occur much more often than the former. Such arbitrage opportunities tend to occur when the markets are active and volatile. Over the 12-year, tick-data samples, the number of free lunch opportunities has dramatically declined and the probability of the opportunities disappearing within one second has steadily increased. The size of expected profits is higher than transaction costs; trades that simultaneously take place on both sides of ask and bid (or three currency trades in case of triangular arbitrage) occur more often when free lunch appeared one second earlier than otherwise, suggesting that free lunch opportunities are actively taken. The probability of its disappearance within one second was less than 50% in 1999, but increased to about 90% by 2009. Less frequent occurrence and quicker disappearance in recent years are attributable to changes in trading microstructure: an introduction and proliferation of the Primary Customer system (weaker banks can use stronger banks’ credit lines) and of direct connection of traders’ programmed computers to the EBS computer. |
| JEL: | F31 G12 G14 G15 G23 G24 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18541&r=mst |