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on Market Microstructure |
| By: | Hautsch, Nikolaus; Huang, Ruihong |
| Abstract: | Trading under limited pre-trade transparency becomes increasingly popular on financial markets. We provide first evidence on traders' use of (completely) hidden orders which might be placed even inside of the (displayed) bid-ask spread. Employing TotalView-ITCH data on order messages at NASDAQ, we propose a simple method to conduct statistical inference on the location of hidden depth and to test economic hypotheses. Analyzing a wide cross-section of stocks, we show that market conditions reflected by the (visible) bid-ask spread, (visible) depth, recent price movements and trading signals significantly affect the aggressiveness of 'dark' liquidity supply and thus the 'hidden spread'. Our evidence suggests that traders balance hidden order placements to (i) compete for the provision of (hidden) liquidity and (ii) protect themselves against adverse selection, front-running as well as 'hidden order detection strategies' used by high-frequency traders. Accordingly, our results show that hidden liquidity locations are predictable given the observable state of the market. -- |
| Keywords: | Limit Order Market,Hidden Liquidity,High-Frequency Trading,Non-Display Order,Iceberg Orders |
| JEL: | G14 C24 C25 G17 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:201204&r=mst |
| By: | Aim\'e Lachapelle; Jean-Michel Lasry; Charles-Albert Lehalle; Pierre-Louis Lions |
| Abstract: | This paper deals with a stochastic order-driven market model with waiting costs, for order books with heterogenous traders. Offer and demand of liquidity drives price formation and traders anticipate future evolutions of the order book. The natural framework we use is mean field game theory, a class of stochastic differential games with a continuum of anonymous players. Several sources of heterogeneity are considered including the mean size of orders. Thus we are able to consider the coexistence of Institutional Investors and High Frequency Traders (HFT). We provide both analytical solutions and numerical experiments. Implications on classical quantities are explored: order book size, prices, and effective bid/ask spread. According to the model, in markets with Institutional Investors only we show the existence of inefficient liquidity imbalances in equilibrium, with two symmetrical situations corresponding to what we call liquidity calls for liquidity. During these situations the transaction price significantly moves away from the fair price. However this macro phenomenon disappears in markets with both Institutional Investors and HFT, although a more precise study shows that the benefits of the new situation go to HFT only, leaving Institutional Investors even with higher trading costs. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1305.6323&r=mst |
| By: | Pikulina, E.S.; Renneboog, L.D.R.; Horst, J.R. ter; Tobler, P.N. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: Little is known about how different bonus schemes affect traders’ propensity to trade and which bonus schemes improve traders’ performance. We study the effects of linear versus threshold (convex) bonus schemes on traders’ behavior. Traders purchase and sell shares in an experimental stock market on the basis of fundamental and technical information (evolution of the market index, past share price evolution, realized earnings, and analysts’ earnings forecasts). We find that traders trade more intensively (the number of transactions augments) under the threshold than under the linear bonus scheme. When market conditions are such that a higher profitability can be more easily reached, trading frequency only increases little under a threshold scheme, but the size of trades is significantly larger than in the case of market conditions with lower profitability. Furthermore, trading intensity significantly decreases when bonus thresholds are reached but only after building in a safety margin. Under the threshold scheme, the traders’ performance is lower (even when there are no transaction costs) than under the linear bonus scheme as a consequence of poorer market timing. This is especially the case when earning money by trading is relatively difficult (under low profitability conditions). Nevertheless, under low profitability conditions, traders seem to collect more information about the relationships between share price and market returns, earnings, and earnings forecasts, apply more effort to understand those relationships, and finally show better performance. |
| Keywords: | Bonus;Compensation;Investment Decisions;Trading Behavior. |
| JEL: | G11 J33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013030&r=mst |