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on Market Microstructure |
| By: | Sabrina Buti; Barbara Rindi; Yuanji Wen; Ingrid M. Werner |
| Abstract: | We show that following a tick size reduction in a decimal public limit order book (PLB) market quality and welfare fall for illiquid but increase for liquid stocks. If a Sub-Penny Venue (SPV) starts competing with a penny-quoting PLB, market quality deteriorates for illiquid, low priced stocks, while it improves for liquid, high priced stocks. As all traders can demand liquidity on the SPV, traders' welfare increases. If the PLB facing competition from a SPV lowers its tick size, PLB spread and depth decline and total volume and welfare increase irrespective of stock liquidity. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:492&r=mst |
| By: | Christoph K\"uhn; Johannes Muhle-Karbe |
| Abstract: | A small investor provides liquidity at the best bid and ask prices of a limit order market. For small spreads and frequent orders of other market participants, we explicitly determine the investor's optimal policy and welfare. In doing so, we allow for general dynamics of the mid price, the spread, and the order flow, as well as for arbitrary preferences of the liquidity provider under consideration. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.5235&r=mst |
| By: | Arie E. Gozluklu; Pietro Perotti; Barbara Rindi; Roberta Fredella |
| Abstract: | Trading venues often impose a minimum trade unit constraint (MTUC) to facilitate order execution. This paper examines the effects of a natural experiment at Borsa Italiana where the exchange reduced the MTUC to one share for all stocks. After the removal of the MTUC, we observe a substantial improvement in liquidity, measured by a decrease in the bid-ask spread and an increase in market depth. The cross-sectional evidence shows that those firms for which the MTUC was more binding benefit the most from the microstructure change. These findings are consistent with a model of asymmetric information in which the MTUC affects traders’ choice of order size. As the model predicts, liquidity improves following the reduction in adverse selection costs. KEYWORDS: minimum trade unit constraint, limit order book, market liquidity, adverse selection costs |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:493&r=mst |
| By: | Pierre Blanc; R\'emy Chicheportiche; Jean-Philippe Bouchaud |
| Abstract: | We decompose, within an ARCH framework, the daily volatility of stocks into overnight and intraday contributions. We find, as perhaps expected, that the overnight and intraday returns behave completely differently. For example, while past intraday returns affect equally the future intraday and overnight volatilities, past overnight returns have a weak effect on future intraday volatilities (except for the very next one) but impact substantially future overnight volatilities. The exogenous component of overnight volatilities is found to be close to zero, which means that the lion's share of overnight volatility comes from feedback effects. The residual kurtosis of returns is small for intraday returns but infinite for overnight returns. We provide a plausible interpretation for these findings, and show that our IntraDay/Overnight model significantly outperforms the standard ARCH framework based on daily returns for Out-of-Sample predictions. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.5806&r=mst |