New Economics Papers
on Market Microstructure
Issue of 2013‒08‒23
six papers chosen by
Thanos Verousis

  1. A dynamic limit order market with fast and slow traders By Hoffmann, Peter
  2. The Optimal Order Execution Problem within the Framework of a High-Frequency Trading - Sample Model By Bławat, Bogusław
  3. Catching falling knives: speculating on market overreaction By Colliard, Jean-Edouard
  4. Adverse selection, market access and inter-market competition By Hoffmann, Peter
  5. Now-casting and the real-time data flow By Bańbura, Marta; Giannone, Domenico; Modugno, Michele; Reichlin, Lucrezia
  6. Price Jump Indicators: Stock Market Empirics During the Crisis By Jan Novotný; Jan Hanousek; Evžen Kočenda

  1. By: Hoffmann, Peter
    Abstract: We study the role of high-frequency trading in a dynamic limit order market. Being fast is valuable because it enables traders to revise outstanding limit orders upon news arrivals when interacting with slow market participants. On the one hand, the existence of fast traders can help to reduce the inefficiency that is rooted in the risk of being "picked off" after unfavourable price movements and therefore allows more gains from trade to be realized. On the other hand, slow traders face a relative loss in bargaining power which leads them to strategically submit limit orders with a lower execution probability, thereby reducing trade. Due to this negative externality, the equilibrium level of investment is always welfare-reducing. The model generates additional testable implications regarding the effects of high-frequency trading on order flow statistics. JEL Classification: G19, C72, D62
    Keywords: High-frequency trading, limit order market
    Date: 2013–03
  2. By: Bławat, Bogusław
    Abstract: Optimal execution of large orders is examined within the technical framework of High-Frequency Trading (HFT). A sample model is proposed, which extends an existing strategy through HFT means like time slicing with random splitting of the order volume and time shifting. As this strategy brings some information asymmetry to the trading parties, a general question about its impact on market benefit is raised and proposed for further academic research.
    Keywords: Optimal order execution, HFT, liquidity
    JEL: C58 G14
    Date: 2012
  3. By: Colliard, Jean-Edouard
    Abstract: Market participants often invest in order to acquire information that pertains to the market itself (e.g. order flow) rather than to fundamentals. This enables them to infer more information from past trades. I show that agents trading on such information, typically high-frequency traders, decrease the likelihood of short-lived mispricings by trading against price pressure. In the long-run however, such countervailing speculation amounts to signal-jamming, slowing down price discovery. These traders insure the market against short-run crashes by "catching falling knives". Higher adverse selection and slower convergence form the "premium" paid by other market participants. JEL Classification: D82, G0, G12, G14.
    Keywords: High-frequency trading, market crashes, Speculation, supply information
    Date: 2013–05
  4. By: Hoffmann, Peter
    Abstract: We study the role of informed trading in a fragmented financial market under the absence of inter-market price priority. Due to frictions in traders’ market access, liquidity providers on alternative trading platforms may be exposed to an increased adverse selection risk. As a consequence, the main market dominates (offers better quotes) frequently albeit charging higher transaction fees. The empirical analysis of a dataset of trading in French and German stocks suggests that trades on Chi-X, a lowcost trading platform, carry significantly more private information than those executed in the Primary Markets. Consistent with our theory, we find a negative relationship between the competitiveness of Chi-X’s quotes and this excess adverse selection risk faced by liquidity providers in the cross-section. Our results have some implications for the design of best-execution policies. JEL Classification: G10, G14, G24
    Keywords: adverse selection, Inter-market competition, MiFID, Transaction fees
    Date: 2013–03
  5. By: Bańbura, Marta; Giannone, Domenico; Modugno, Michele; Reichlin, Lucrezia
    Abstract: The term now-casting is a contraction for now and forecasting and has been used for a long-time in meteorology and recently also in economics. In this paper we survey recent developments in economic now-casting with special focus on those models that formalize key features of how market participants and policy makers read macroeconomic data releases in real time, which involves: monitoring many data, forming expectations about them and revising the assessment on the state of the economy whenever realizations diverge sizeably from those expectations. (Prepared for G. Elliott and A. Timmermann, eds., Handbook of Economic Forecasting, Volume 2, Elsevier-North Holland). JEL Classification: E32, E37, C01, C33, C53
    Keywords: macroeconomic forecasting, Macroeconomic news, mixed frequency, real-time data, state space models
    Date: 2013–07
  6. By: Jan Novotný; Jan Hanousek; Evžen Kočenda
    Abstract: We analyze the behavior and performance of multiple price jump indicators across markets and over time. By using high-frequency stock market data we identify clusters of price jump indicators that share similar properties in terms of their performance in that they minimize Type I and Type II errors. We show that clusters of price jump indicators formed over the observations do not exhibit equal size. Clusters are stable across stock market indices and accuracy across price jump indicators are both stable over time. There was no significant change in the composition of clusters associated with market activity and the detected numbers of price jumps are stable over time. The recent financial crisis does not seem to affect the overall jumpiness of mature or emerging stock markets. Our results support the stress testing approach of the Basel III Accords in that the jump component of the volatility process does not need to be treated separately for the purpose of stress testing.
    Keywords: stock markets; price jump indicators; non-parametric testing; clustering analysis; financial econometrics; Basel Accords
    JEL: C14 C58 F37 G15 G17
    Date: 2013–06–15

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