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on Market Microstructure |
| By: | Foucault , Thierry; Kozhan , Roman |
| Abstract: | High frequency arbitrage opportunities arise when the price of one asset follows, with a lag, changes in the value of another related asset due to information arrival. These opportunities are toxic because they expose liquidity suppliers to the risk of being picked off by arbitrageurs. Hence, more frequent toxic arbitrage opportunities and a faster arbitrageurs' response to these opportunities impair liquidity. The authors find support for these predictions using high frequency triangular arbitrage opportunities in the FX market. In their sample, a 1% increase in the likelihood that a toxic arbitrage terminates with an arbitrageur's trade (rather than a quote update) raises bid-ask spreads by about 4%. |
| Keywords: | Arbitrage; Adverse Selection; Liquidity; High Frequency Trading |
| JEL: | D50 F31 G10 |
| Date: | 2014–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1040&r=mst |
| By: | Sun, Zhuowei; Dunne, Peter G.; Li, Youwei |
| Abstract: | Inter-dealer trading in US Treasury securities is almost equally divided between two electronic trading platforms that have only slight differences in terms of their relative liquidity and transparency. BrokerTec is more active in the trading of 2-, 5-, and 10-year T-notes while eSpeed has more active trading in the 30-year bond. Over the period studied, eSpeed provides a more pre-trade transparent platform than BrokerTec. We examine the contribution to ‘price discovery’ of activity in the two platforms using high frequency data. We find that price discovery does not derive equally from the two platforms and that the shares vary across term to maturity. This can be traced to differential trading activities and transparency of the two platforms. |
| Keywords: | Microstructure; Treasury market; Bid-ask spread; Price discovery |
| JEL: | C32 D4 G10 G12 G14 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61440&r=mst |
| By: | FOUCAULT, Thierry; DUGAST, Jérôme |
| Abstract: | Speculators can discover whether a signal is true or false by processing it but this takes time. Hence they face a trade-off between trading fast on a signal (i.e., before processing it), at the risk of trading on a false positive, or trading after processing the signal, at the risk that prices already reflect their information. The number of speculators who choose to trade fast increases with news reliability and decreases with the cost of fast trading technologies. The authors derive testable implications for the effects of these variables on (i) the value of information, (ii) patterns in returns and trades, (iii) the frequency of price reversals in a stock, and (iv) informational efficiency. Cheaper fast trading technologies simultaneously raise informational efficiency and the frequency of "mini-flash crashes": large price movements that revert quickly. |
| Keywords: | News; High-Frequency Trading; Price Reversals; Informational Efficiency; Mini-Flash Crashes |
| JEL: | G10 G12 G14 |
| Date: | 2014–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1036&r=mst |
| By: | Langedijk, Sven; Monokroussos, George; Papanagiotou, Evangelia |
| Abstract: | We revisit a central task of the extant liquidity literature, which is to identify effective measures of liquidity. We critically assess the influential practice of identifying the best liquidity measures based on monthly correlations by comparing and contrasting correlations between monthly and daily averages of high-frequency benchmarks and low-frequency proxies of liquidity, as well as by examining the coherences between such measures. Furthermore, we propose MIDAS regressions as a way of investigating the bilateral relationships between benchmarks and proxies without averaging out potentially valuable high-frequency information, as is common practice. We conclude that the empirical correlations between benchmarks and proxies in general become weaker as the frequency over which these relationships are examined becomes higher, and that standard practices may lead to misleading conclusions. One implication of our results is that any liquidity measure needs to be assessed against the relevant timeframe for conversion into cash. |
| Keywords: | Liquidity; Market Microstructure; High-Frequency Data; Sovereign Bonds; MIDAS; Coherence. |
| JEL: | C58 G12 G28 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61865&r=mst |
| By: | Baltzer, Markus; Jank, Stephan; Smajlbegovic, Esad |
| Abstract: | Using a unique data set that contains the complete ownership structure of the German stock market, we study the momentum and contrarian trading of different investor groups. Foreign investors and financial institutions, and especially mutual funds, are momentum traders, whereas private households are contrarians. Contrarian trading by private households declines with investors' financial sophistication though, as proxied by financial wealth and equity home bias. Observing momentum trading over time, we document substantial increase in sales of loser stocks by foreign and institutional investors during the market downturn of the Great Recession and just before the crash of the momentum strategy in 2009. Finally, our evidence indicates that excessive sales of loser stocks pushed prices below their fundamental value, predicting the relative overperformance of past losers and the reversal of the momentum strategy. |
| Keywords: | momentum anomaly,momentum crash,investor behavior,institutional investors,individual investors |
| JEL: | G10 G14 G23 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1501&r=mst |