New Economics Papers
on Market Microstructure
Issue of 2013‒11‒22
seven papers chosen by
Thanos Verousis

  1. Simulating the Synchronizing Behavior of High-Frequency Trading in Multiple Markets By Benjamin Myers; Austin Gerig
  2. High frequency trading and end-of-day price dislocation By Aitken, Michael; Cumming, Douglas; Zhan, Feng
  3. Internalization, clearing and settlement, and liquidity. By Degryse, Hans; Van Achter, Mark; Wuyts, Gunther
  4. Exchange trading rules, surveillance and insider trading By Aitken, Michael; Cumming, Douglas; Zhan, Feng
  5. The intra-day impact of communication on euro-dollar volatility and jumps. By Dewachter, Hans; Erdemlioglu, Deniz; Gnabo, Jean-Yves; Lecourt, Christelle
  6. Impact of information cost and switching of trading strategies in an artificial stock market By Yi-Fang Liu; Chao Xu; Wei Zhang; J{\o}rgen Vitting Andersen
  7. The 2011 European short sale ban on financial stocks: A cure or a curse? By Félix, Luiz; Kräussl, Roman; Stork, Philip

  1. By: Benjamin Myers; Austin Gerig
    Abstract: Nearly one-half of all trades in financial markets are executed by high-speed, autonomous computer programs -- a type of trading often called high-frequency trading (HFT). Although evidence suggests that HFT increases the efficiency of markets, it is unclear how or why it produces this outcome. Here we create a simple model to study the impact of HFT on investors who trade similar securities in different markets. We show that HFT can improve liquidity by allowing more transactions to take place without adversely affecting pricing or volatility. In the model, HFT synchronizes the prices of the securities, which allows buyers and sellers to find one another across markets and increases the likelihood of competitive orders being filled.
    Date: 2013–11
  2. By: Aitken, Michael; Cumming, Douglas; Zhan, Feng
    Abstract: We show that the presence of high frequency trading (HFT) has significantly mitigated the frequency and severity of end-of-day price dislocation, counter to recent concerns expressed in the media. The effect of HFT is more pronounced on days when end of day price dislocation is more likely to be the result of market manipulation on days of option expiry dates and end of month. Moreover, the effect of HFT is more pronounced than the role of trading rules, surveillance, enforcement and legal conditions in curtailing the frequency and severity of end-ofday price dislocation. We show our findings are robust to different proxies of the start of HFT by trade size, cancellation of orders, and co-location. --
    Keywords: High frequency trading,End-of-day Price dislocation,Manipulation,Trading Rules,Surveillance,Law and Finance
    JEL: G12 G14 G18 K22
    Date: 2013
  3. By: Degryse, Hans; Van Achter, Mark; Wuyts, Gunther
    Abstract: We study the relation between liquidity in financial markets and post-trading fees (i.e. clearing and settlement fees). The clearing and settlement agent (CSD) faces different marginal costs for different types of transactions. Costs are lower for an internalized transaction, i.e. when buyer and seller originate from the same broker. We study two fee structures that the CSD applies to cover its costs. The first is a uniform fee on all trades internalized and non-internalized) such that the CSD breaks even on average. Traders then maximize trading rates and higher post-trading fees increase observed liquidity in the market. The second fee structure features a CSD breaking even by charging the internalized and non-internalized trades their respective marginal cost. In this case,traders face the following trade-off: address all possible counterparties at the expense of considerable post-trading fees, or enjoy lower post-trading fees by targeting own-broker counterparties only. This difference in post-trading fees drives traders' strategies and thus liquidity. Furthermore, across the two fee structures, we find that observed liquidity may differ from cum-fee liquidity (which encompasses the post-trading fees). With trade-specific fees, the cum-fee spread depends on the interacting counterparties. Next, regulators can improve welfare by imposing a particular fee structure. The optimal fee structure hinges on the magnitude of the post-trading costs. Noteworthy, a fee structure yielding higher social welfare may in fact reduce observed liquidity. Finally, we consider a number of extensions including market power for the CSD, anonymous trading and differences in broker size.
    Keywords: transaction fees; internalization; clearing and settlement; liquidity; anonymity;
    Date: 2012–01
  4. By: Aitken, Michael; Cumming, Douglas; Zhan, Feng
    Abstract: We examine the impact of stock exchange trading rules and surveillance on the frequency and severity of suspected insider trading cases in 22 stock exchanges around the world over the period January 2003 through June 2011. Using new indices for market manipulation, insider trading, and broker-agency conflict based on the specific provisions of the trading rules of each stock exchange, along with surveillance to detect non-compliance with such rules, we show that more detailed exchange trading rules and surveillance over time and across markets significantly reduce the number of cases, but increase the profits per case. --
    Keywords: Insider trading,Surveillance,Exchange Trading Rules,Law and Finance
    JEL: G12 G14 G18 K22
    Date: 2013
  5. By: Dewachter, Hans; Erdemlioglu, Deniz; Gnabo, Jean-Yves; Lecourt, Christelle
    Abstract: In this paper, we examine the intra-day effects of verbal statements and comments on the FX market uncertainty using two measures: continuous volatility and discontinuous jumps. Focusing on the euro-dollar exchange rate, we provide empirical evidence of how these two sources of uncertainty matter in measuring the short-term reaction of exchange rates to communication events. Talks significantly trigger large jumps or extreme events for approximately an hour after the news release. Continuous volatility starts reacting prior to the news, intensifies around the release time and stays at high levels for several hours. Our results suggest that monetary authorities generally tend to communicate with markets on days when uncertainty is relatively severe, and higher than normal. Disentangling the US and Euro area statements, we also find that abnormal levels of volatility are mostly driven by the communication of the Euro area officials rather than US authorities.
    Date: 2013
  6. By: Yi-Fang Liu; Chao Xu; Wei Zhang; J{\o}rgen Vitting Andersen
    Abstract: This paper studies the switching of trading strategies and the effect it can have on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First we verify that our model is able to reproduce some of the typical properties (stylized facts) of real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that the returns of all the uninformed agents are negatively related to the percentage of switchers in the market. In addition, we find that the market volatility is higher with the presence of switchers in the market and that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to switch at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers.
    Date: 2013–11
  7. By: Félix, Luiz; Kräussl, Roman; Stork, Philip
    Abstract: Did the August 2011 European short sale bans on financial stocks accomplish their goals? In order to answer this question, we use stock options' implied volatility skews to proxy for investors' risk aversion. We find that on ban announcement day, risk aversion levels rose for all stocks but more so for the banned financial stocks. The banned stocks' volatility skews remained elevated during the ban but dropped for the other unbanned stocks. We show that it is the imposition of the ban itself that led to the increase in risk aversion rather than other causes such as information flow, options trading volumes, or stock specific factors. Substitution effects were minimal, as banned stocks' put trading volumes and put-call ratios declined during the ban. We argue that although the ban succeeded in curbing further selling pressure on financial stocks by redirecting trading activity towards index options, this result came at the cost of increased risk aversion and some degree of market failure. --
    Keywords: short-selling,ban,financial stocks,implied volatility skew,risk aversion
    JEL: G01 G28
    Date: 2013

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