New Economics Papers
on Market Microstructure
Issue of 2012‒12‒15
two papers chosen by
Thanos Verousis

  1. High-frequency trading behaviour and its impact on market quality: evidence from the UK equity market By Benos, Evangelos; Sagade, Satchit
  2. A Good Beginning Makes a Good Market: The Effect of Different Market Opening Structures on Market Quality By Gernot Hinterleitner; Philipp Hornung; Ulrike Leopold-Wildburger; Roland Mestel; Stefan Palan

  1. By: Benos, Evangelos (Bank of England); Sagade, Satchit (ICMA Centre, Henley Business School, University of Reading)
    Abstract: We analyse the intraday behaviour of high-frequency traders (HFTs) and its impact on aspects of market quality such as liquidity, price discovery and excess volatility. For that, we use a unique transactions data set for four UK stocks, over the period of a randomly selected week. Our data identifies the counterparties to each transaction, enabling us to track the trading behaviour of individual HFTs. We first find that HFTs differ significantly from each other in terms of liquidity provision: while some HFTs mostly consume liquidity (ie trade more ‘aggressively’) by primarily executing trades via market orders, others mostly supply liquidity (ie trade more ‘passively’) by primarily executing trades via limit orders. To examine how trading behaviour is related to these patterns of liquidity provision, we split the HFTs in two groups, according to their trade aggressiveness, and examine the behaviour and impact of each group separately. We find that the ‘passive’ HFTs follow a trading strategy consistent with market making and as such their trades have alternating signs and are independent of recent (ten-second) price changes. By contrast, ‘aggressive’ HFTs exhibit persistence in the direction of their trades and trade in line with the recent (ten-second) price trend. We then explore the relationship between HFT activity and market quality. We find that both higher price volatility and lower spreads cause HFT activity to increase. We suggest a number of reasons as to why this might be so. Finally, we use a tick time specification to examine the impact of HFT activity on price discovery (ie information-based volatility) and noise (ie excess volatility). We find that while HFTs have a higher information-to-noise contribution ratio than non-HFTs, there are instances where this is accompanied by a large absolute noise contribution.
    Keywords: High-frequency trading; liquidity; price discovery; volatility
    JEL: G10
    Date: 2012–12–03
  2. By: Gernot Hinterleitner (Institute of Statistics and Opterations Research, Karl-Franzens-University Graz); Philipp Hornung (Institute of Statistics and Opterations Research, Karl-Franzens-University Graz); Ulrike Leopold-Wildburger (Institute of Statistics and Opterations Research, Karl-Franzens-University Graz); Roland Mestel (Institute of Banking and Finance, Karl-Franzens-University Graz); Stefan Palan (Institute of Banking and Finance, Karl-Franzens-University Graz)
    Abstract: This paper deals with the market structure at the opening of the trading day and its influence on subsequent trading. We compare a single continuous double auction and two complement markets with different call auction designs as opening mechanisms in a unified experimental framework. The call auctions differ with respect to their levels of transparency. We find that a call auction not only improves market quality at the beginning of the trading day when com-pared to the stand-alone continuous double auction, but also causes positive spillover effects on subsequent trading. Concerning the design of the opening call auction, we find no signifi-cant differences between the transparent and nontransparent specification with respect to opening prices and liquidity. In the course of subsequent continuous trading, however, market quality is slightly higher after a nontransparent call auction.
    Keywords: Call auction, continuous double auction, transparency, market quality
    JEL: D02 D44 G10
    Date: 2012–05–25

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