New Economics Papers
on Market Microstructure
Issue of 2014‒03‒01
six papers chosen by
Thanos Verousis

  1. Throttling hyperactive robots - Message to trade ratios at the Oslo Stock Exchange By Jørgensen, Kjell; Skjeltorp, Johannes Atle; Ødegaard, Bernt Arne
  2. On Simulation of Various Effects in Consolidated Order Book By A. O. Glekin; A. Lykov; K. L. Vaninsky
  3. Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax By Huber, Jürgen; Kirchler, Michael; Kleinlercher, Daniel; Sutter, Matthias
  4. A New Spread Estimator By Michael Bleaney; Zhiyong Li
  5. Ergodicity and scaling limit of a constrained multivariate Hawkes process By Ban Zheng; François Roueff; Frédéric Abergel
  6. Trading with Small Price Impact By Ludovic Moreau; Johannes Muhle-Karbe; H. Mete Soner

  1. By: Jørgensen, Kjell (Norwegian Business School (BI) and University of Stavanger); Skjeltorp, Johannes Atle (Norges Bank); Ødegaard, Bernt Arne (University of Stavanger (UiS) and Norwegian School of Economics (NHH))
    Abstract: We use the introduction of a cost on high message to trade ratios for traders at the Oslo Stock Exchange to investigate the effects on market quality and fragmentation of introduction of such ``speed bumps'' to equity trading. The exchange introduced a fee payable by market participants whose orders (messages to the exchange's trade system) exceeded seventy times the number of consummated trades. Market participants quickly adjusted their behavior to avoid paying the extra cost. The overall ratios of messages to trades fell, but common measures of the quality of trading, such as liquidity, transaction costs, and realized volatility, did not deteriorate, they were essentially unchanged. This is a policy intervention where we can match the treated sample (OSE listed stocks) with the same assets traded elsewhere. We can therefore do a ``diff in diff'' analysis of liquidity in Oslo compared with liquidity of the same asset traded on other exchanges. Surprisingly, we see that liquidity, as measured by the spread, deteriorated on alternative market places when the tax was introduced, a tax that is only valid for trading at the OSE. The spread is the only liquidity measure for which we observe this difference between the OSE and other markets, for depth and turnover we do not find any differences between other markets and the OSE.
    Keywords: High Frequency Trading; Regulation; Message to Trade Ratio; Order to Trade Ratio
    JEL: G10 G20
    Date: 2014–02–18
  2. By: A. O. Glekin; A. Lykov; K. L. Vaninsky
    Abstract: This paper consists of two parts. The first part is devoted to empirical analysis of consolidated order book (COB) for the index RTS futures. In the second part we consider Poissonian multi--agent model of the COB. By varying parameters of different groups of agents submitting orders to the book we are able to model various real life phenomenons. In particular we model the spread, the profile of the book and large price changes. Two different mechanisms of large price changes are considered in detail. One is the disbalance of liquidity in the COB and another is the disbalance of sell and buy orders in the order flow.
    Date: 2014–02
  3. By: Huber, Jürgen (University of Innsbruck); Kirchler, Michael (University of Innsbruck); Kleinlercher, Daniel (University of Innsbruck); Sutter, Matthias (European University Institute)
    Abstract: While politically attractive in order to generate tax revenues, the effects of a financial transaction tax (FTT) are scientifically disputed, not the least because seemingly small details of its implementation may matter a lot. In this paper, we provide experimental evidence on the different effects of a FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that the effects of a tax on markets are different from a tax on residents, with negative effects of a market tax on volatility and trading volume. The residence principle shows none of these undesired effects. In addition to studying aggregate market outcomes, we investigate how individual traders react to different forms of a FTT and whether their risk attitude is related to these reactions. We find no such relationship, meaning that a FTT affects traders with different risk tolerances similarly.
    Keywords: Financial Transaction Tax, experimental finance, residence principle, market principle
    JEL: C91 G10 E62
    Date: 2014–02
  4. By: Michael Bleaney; Zhiyong Li
    Abstract: A new estimator of bid-ask spreads is presented. When the trade direction is known, any estimate of the spread is associated with a unique series of conjectural mid-prices derived by adjusting the observed transaction price by half the estimated spread. It is shown that the covariance of successive conjectural midprice returns is maximised (or least negative) when the estimated spread is equal to the true spread. A search procedure to maximise this covariance may therefore be used to estimate the true spread. The performance of this estimator under various conditions is examined both theoretically and with Monte Carlo simulations. The simulations confirm the theoretical results. The performance of the estimator is good.
    Keywords: Bid-ask Spread, Feedback Trading, Estimation JEL codes: G10
    Date: 2014–02
  5. By: Ban Zheng (LTCI - Laboratoire Traitement et Communication de l'Information [Paris] - Télécom ParisTech - CNRS : UMR5141, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris); François Roueff (LTCI - Laboratoire Traitement et Communication de l'Information [Paris] - Télécom ParisTech - CNRS : UMR5141); Frédéric Abergel (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris)
    Abstract: We introduce a multivariate Hawkes process with constraints on its conditional density. It is a multivariate point process with conditional intensity similar to that of a multivariate Hawkes process but certain events are forbidden with respect to boundary conditions on a multidimensional constraint variable, whose evolution is driven by the point process. We study this process in the special case where the fertility function is exponential so that the process is entirely described by an underlying Markov chain, which includes the constraint variable. Some conditions on the parameters are established to ensure the ergodicity of the chain. Moreover, scaling limits are derived for the integrated point process. This study is primarily motivated by the stochastic modelling of a limit order book for high frequency financial data analysis.
    Keywords: Point processes;Hawkes processes;Limit theorems;Discretisation of stochastic processes;limit order book
    Date: 2014–02–04
  6. By: Ludovic Moreau; Johannes Muhle-Karbe; H. Mete Soner
    Abstract: An investor trades a safe and several risky assets with linear price impact to maximize expected utility from terminal wealth. In the limit for small impact costs, we explicitly determine the optimal policy and welfare, in a general Markovian setting allowing for stochastic market, cost, and preference parameters. These results shed light on the general structure of the problem at hand, and also unveil close connections to optimal execution problems and to other market frictions such as proportional and fixed transaction costs.
    Date: 2014–02

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