New Economics Papers
on Market Microstructure
Issue of 2013‒10‒18
three papers chosen by
Thanos Verousis

  1. Tick Size Regulation and Sub-Penny Trading By Buti, Sabrina; Rindi, Barbara; Wen, Yuanji; Werner, Ingrid M.
  2. The Twilight Zone: OTC Regulatory Regimes and Market Quality By Bruggemann, Ulf; Kaul, Aditya; Leuz, Christian; Werner, Ingrid M.
  3. Optimal Order Scheduling for Deterministic Liquidity Patterns By Peter Bank; Antje Fruth

  1. By: Buti, Sabrina (University of Toronto); Rindi, Barbara (Bocconi University); Wen, Yuanji (Bocconi University); Werner, Ingrid M. (OH State University)
    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.
    JEL: G10 G12 G20 G23 G24
    Date: 2013–09
  2. By: Bruggemann, Ulf (Humboldt University of Berlin); Kaul, Aditya (University of Alberta); Leuz, Christian (University of Chicago and University of PA); Werner, Ingrid M. (OH State University)
    Abstract: We analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. As little is known about this market, we first characterize OTC firms by trading venue and provide evidence on survival, success, frequency of venue changes, reporting status, and trading activity. A large number of new firms appear on the OTC market each year. With few exceptions, these new firms exhibit poor performance and rarely rise to trade on traditional exchanges. We analyze how market liquidity, price efficiency and crash risk, all of which capture aspects of market quality, differ across OTC venues and firms subject to different regulatory regimes, including federal securities and state blue sky laws. We show that OTC firms that are subject to stricter regulatory regimes have higher market liquidity and price efficiency, and lower return skewness. We also analyze OTC market features that are potential substitutes for SEC registration, such as publication in a securities manual or state merit reviews, and provide evidence on their capital-market effects. This evidence is relevant in light of the JOBS Act and the ensuing relaxation of SEC registration requirements. Overall, our results suggest that investors consider information and regulatory differences when trading OTC stocks.
    JEL: G14 G15 G30 K22 M41 M48
    Date: 2013–08
  3. By: Peter Bank; Antje Fruth
    Abstract: We consider a broker who has to place a large order which consumes a sizable part of average daily trading volume. The broker's aim is thus to minimize execution costs he incurs from the adverse impact of his trades on market prices. By contrast to the previous literature, see, e.g., Obizhaeva and Wang (2005), Predoiu, Shaikhet, and Shreve (2011), we allow the liquidity parameters of market depth and resilience to vary deterministically over the course of the trading period. The resulting singular optimal control problem is shown to be tractable by methods from convex analysis and, under minimal assumptions, we construct an explicit solution to the scheduling problem in terms of some concave envelope of the resilience adjusted market depth.
    Date: 2013–10

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