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on Market Microstructure |
| By: | Huh, Yesol (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | In today's markets where high frequency traders (HFTs) act as both liquidity providers and takers, I argue that information asymmetry induced by liquidity-taking HFTs' use of machine-readable information is important. This particular type of information asymmetry arises because some machines may access the information before other machines or because of randomness in relative speed. Applying a novel statistical approach to measure HFT activity through limit order book data and using a natural experiment of index inclusion, I show that liquidity-providing HFTs supply less liquidity to stocks that suffer more from this information asymmetry problem. Moreover, when markets are volatile, this information asymmetry problem becomes more severe, and HFTs supply less liquidity. I discuss implications for market-making activity in times of market stress and for HFT regulations. |
| Keywords: | High frequency trading; liquidity; market microstructure; information asymmetry |
| Date: | 2014–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-33&r=mst |
| By: | Luisella Bosetti (orsa Italiana, London Stock Exchange Group); Pietro Gottardo (University of Pavia, Department of Economics and Management); Maurizio Murgia (Free University of Bolzano - Bozen, School of Economics and Management); Andrea Pinna (Free University of Bolzano - Bozen, School of Economics and Management) |
| Abstract: | This paper uses order-level data of all traders of the Italian stock exchange Borsa Italiana (BI) to resolve three issues that remained unsettled in the extant microstructure literature: the interaction between the exchange and a parallel market for large blocks; the asymmetry between the price impacts of buy and sell orders; and the behaviour of liquidity in the limit order book around large orders. Price impacts and liquidity effects of block trades at BI are surprisingly different from existing empirical literature. Our findings reveal that price effects are much lower in the electronic downstairs market than in the upstairs market. Such result is the opposite of what can be found in previous studies. Moreover, trading costs in the central limit order book at BI are lower than in any other exchange analysed in the past. We explain that in terms of exchange trading architecture. In fact, rules on block trading at BI allowed a parallel dark pool to coexist with the consolidated limit order book well before market liberalization was introduced by the MIFID directive. This left the downstairs market with a selection of liquidity-driven orders and unprecedented low price impacts. |
| Keywords: | Large Orders, Electronic exchange, Upstairs market, Block trading, Price Impact, Liquidity, Dark Pool |
| JEL: | G14 G15 G23 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps15&r=mst |
| By: | Mehdi Lallouache (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris); Frédéric Abergel (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris) |
| Abstract: | Using a new high frequency quality data set we provide a precise empirical study of the interdealer spot market. We check that the main stylized facts of financial time series are valid for the FX market: fat-tailed distribution of returns, aggregational normality and volatility clustering. We report two standard microstructure phenomena: microstructure noise effects in the signature plot and the Epps effect. We find an unusual shape for the average book, the spread distribution being bimodal. We construct the order flow and analyse its main characteristics: volume, placement, arrival intensity and sign. Many quantities have been dramatically affected by the decrease of the tick size in March 2011. We argue that the coexistence of manual traders and algorithmic traders, who react differently to the new tick size, leads to a strong price clustering in all types of orders and affects the price formation. |
| Date: | 2013–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01006414&r=mst |
| By: | Caporin, Massimiliano; Ranaldo, Angelo; Velo, Gabriel G. |
| Abstract: | Taking advantage of a trades-and-quotes high-frequency database, we document the main stylized facts and dynamic properties of spot precious metals, i.e. gold, silver, palladium, and platinum. We analyze the behaviors of spot prices, returns, volume, and selected liquidity measures. We find clear evidence of periodic patterns matching the trading hours of the most active markets round-the-clock. The time series of spot returns have thus properties similar to those of traditional financial assets with fat tails, asymmetry, periodic behaviors in the conditional variances, and volatility clustering. The gold (platinum) is the most (least) liquid and less (most) volatile asset. Commonality in liquidities of precious metals is very strong. |
| Keywords: | precious metals, high-frequency data, liquidity, commonality in liquidity, intradaily periodicity |
| JEL: | C58 C22 C52 G10 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2014:09&r=mst |
| By: | Marouane Anane (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris); Frédéric Abergel (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris) |
| Abstract: | The aim of this study is to quantify the low latency advantage of High Frequency Trading (HFT) and to compute, empirically, an optimal holding period of a HF trader. Critics claim that low latency leads to information asymmetry victimizing retail investors. However, objective studies measuring the gain due to this asymmetry are rare. In order to perform the study, new methods are introduced in this paper, in particular, the optimal strategy problem is formulated and ideas are given to compute it in a reasonable amount of time. A new measure, the weighted mean holding period, is introduced and an algorithm to compute it is suggested. Using the previous concepts, a large empirical study based on optimal omniscient strategy is presented and evidence of the low latency advantage limitation is provided. In particular, it is shown that the bid ask spread and the transaction costs lead to a trading frequency much lower than the information renewal frequency. |
| Date: | 2014–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01006401&r=mst |
| By: | Ioane Muni Toke (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, ERIM - Equipe de Recherche en Informatique et Mathématiques - Université de la Nouvelle-Calédonie) |
| Abstract: | In this paper, we study the analytical properties of a one-side order book model in which the flows of limit and market orders are Poisson processes and the distribution of lifetimes of cancelled orders is exponential. Although simplistic, the model provides an analytical tractability that should not be overlooked. Using basic results for birth-and-death processes, we build an analytical formula for the shape (depth) of a continuous order book model which is both founded by market mechanisms and very close to empirically tested formulas. We relate this shape to the probability of execution of a limit order, highlighting a law of conservation of the flows of orders in an order book. We then extend our model by allowing random sizes of limit orders, hereby allowing to study the relationship between the size of the incoming limit orders and the shape of the order book. Our theoretical model shows that, for a given total volume of incoming limit orders, the less limit orders are submitted (i.e. the larger the average size of these limit orders), the deeper is the order book around the spread. This theoretical relationship is finally empirically tested on several stocks traded on the Paris stock exchange. |
| Date: | 2013–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01006410&r=mst |
| By: | Grosche, Stephanie; Heckelei, Thomas |
| Abstract: | Presumed portfolio benefits of commodities and the availability of index fund-type investment products increase attractiveness of commodity markets for financial traders. But resulting “index trading” strategies are suspected to inflate commodity prices above their fundamental value. We use a Heterogeneous Agent Model for the corn futures market, which can depict price dynamics from the interaction of fundamentalist commercial traders and chartist speculators, and estimate its parameters with the Method of Simulated Moments. In a scenario-based approach, we introduce index funds and simulate price effects from their inclusion in financial portfolio strategies. Results show that the additional long-only trading volume on the market does not inflate price levels but increases return volatility. |
| Keywords: | Heterogeneous agents, Agent-based modeling, Commodity index treading, Financialization of commodity markets, Agricultural and Food Policy, Agricultural Finance, Financial Economics, Research Methods/ Statistical Methods, D84, G15, G17, Q02, |
| Date: | 2014–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:ubfred:172077&r=mst |
| By: | Li, Dan (Board of Governors of the Federal Reserve System (U.S.)); Li, Geng (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | We document a robust positive relationship between the belief dispersion about macroeconomic conditions among household investors and the stock market trading volume, using more than 30 years of household survey data and a novel approach to measuring belief dispersions. Notably, such a relationship prevails even after various series of professional analysts' belief dispersions are controlled for. Consistent with a causal effect, such a relationship is most pronounced for belief dispersion among individuals who are most likely to own stocks and for trading volume of stocks that are most visible to household investors. Finally, we present suggestive evidence that the dispersion of changes in belief is also positively associated with the stock trading volume. Our analysis implies that household investors, traditionally viewed as tending to trader randomly, likely possess and trade on information that is not available to professional investors. |
| Keywords: | Belief dispersion; trading volume; household investors; surveys of consumers |
| Date: | 2014–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-35&r=mst |