nep-mst New Economics Papers
on Market Microstructure
Issue of 2014‒12‒29
four papers chosen by
Thanos Verousis

  1. Dark Pool Trading Strategies, Market Quality and Welfare By Sabrina Buti; Barbara Rindi; Ingrid M. Werner
  2. Testing the maximal rank of the volatility process for continuous diffusions observed with noise By Tobias Fissler; Mark Podolskij
  3. Dealer Networks By Li, Dan; Schürhoff, Norman
  4. Trading efficiency of fund families: Impact on fund performance and investment behavior By Cici, Gjergji; Dahm, Laura K.; Kempf, Alexander

  1. By: Sabrina Buti; Barbara Rindi; Ingrid M. Werner
    Abstract: We build a model of a limit order book and examine the consequences of adding a dark pool. Starting with an illiquid book, we show that book and consolidated ?ll rates and volume increase, but the spread widens, depth declines and welfare deteriorates. When book liquidity increases, more orders migrate to the dark pool and large traders?welfare improves; but while the spread-increase is dampened, the depth-reduction is ampli?ed and small traders are still worse off. All e¤ects are stronger for a continuous than for a periodic dark pool and when the tick size is large.
    Date: 2014
  2. By: Tobias Fissler (University of Bern); Mark Podolskij (Aarhus University and CREATES)
    Abstract: In this paper, we present a test for the maximal rank of the volatility process in continuous diffusion models observed with noise. Such models are typically applied in mathematical finance, where latent price processes are corrupted by microstructure noise at ultra high frequencies. Using high frequency observations we construct a test statistic for the maximal rank of the time varying stochastic volatility process. Our methodology is based upon a combination of a matrix perturbation approach and pre-averaging. We will show the asymptotic mixed normality of the test statistic and obtain a consistent testing procedure.
    Keywords: continuous Itô semimartingales, high frequency data, microstructure noise, rank testing, stable convergence
    JEL: C10 C13 C14
    Date: 2014–12–10
  3. By: Li, Dan; Schürhoff, Norman
    Abstract: Dealers in over-the-counter securities form networks to mitigate search frictions. The audit trail for municipal bonds shows the dealer network has a core-periphery structure. Central dealers are more efficient at matching buyers and sellers than peripheral dealers, which shortens intermediation chains and speeds up trading. Investors face a tradeoff between execution speed and cost. Central dealers provide immediacy by pre-arranging fewer trades and holding larger inventory. However, trading costs increase strongly with dealer centrality. Investors with strong liquidity need trade with central dealers and at times of market-wide illiquidity. Central dealers thus serve as liquidity providers of last resort.
    Keywords: decentralization; immediacy; liquidity; market quality; municipal bonds; network analysis; over-the-counter financial market; trading cost; transparency
    JEL: G12 G14 G24
    Date: 2014–11
  4. By: Cici, Gjergji; Dahm, Laura K.; Kempf, Alexander
    Abstract: Mutual funds are part of larger organizations, which make decisions with consequences for all their member funds. This study examines how the efficiency of trading desks operated by fund families affects the performance and trading of affiliated funds. We introduce a novel approach to measure the efficiency of trading desks, which allows for comparisons across families with different investable universes. By operating efficient trading desks, which reduce trading costs, fund families improve the performance of their funds significantly. Furthermore, the lower trading costs resulting from more efficient trading desks enable mutual funds to trade more and hold less liquid portfolios.
    Keywords: mutual funds,fund families,trading efficiency,fund performance,investment behavior
    JEL: D23 G23 G24
    Date: 2014

This nep-mst issue is ©2014 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.