nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒02‒22
five papers chosen by
Thanos Verousis

  1. Stationary distribution of the volume at the best quote in a Poisson order book model By Ioane Muni Toke
  2. Where to Trade: OTC vs Exchanges By Cecilia Parlatore Siritto; Ana Babus
  3. Dark-Pool Perspective of Optimal Market Making By M. Alessandra Crisafi; Andrea Macrina
  4. Does Trading Anonymously Enhance Liquidity? By Dennis, Patrick J.; Sandås, Patrik
  5. Heterogeneous Beliefs and Imperfect Competition in Sequential Auction Markets By Fabrice Rousseau; Hervé Boco; Laurent Germain

  1. By: Ioane Muni Toke
    Abstract: In this paper, we develop a Markovian model that deals with the volume offered at the best quote of an electronic order book. The volume of the first limit is a stochastic process whose paths are periodically interrupted and reset to a new value, either by a new limit order submitted inside the spread or by a market order that removes the first limit. Using applied probability results on killing and resurrecting Markov processes, we derive the stationary distribution of the volume offered at the best quote. All proposed models are empirically fitted and compared, stressing the importance of the proposed mechanisms.
    Date: 2015–02
  2. By: Cecilia Parlatore Siritto (The Wharton School - University of Pennsylvania); Ana Babus (Imperial College London)
    Abstract: This paper proposes a theory which explains why some assets are traded over the counter while others are traded in centralized exchanges. We develop a model in which the equilibrium market structure is driven by the differences in the trading needs of investors. In our model, trade takes place sequentially. In the first stage, dealers open trading posts and set their trading strategies. One or more dealers can locate at the same trading post. In the second stage, traders decide which trading post to join depending on how many dealers there are at the respective trading post. We show that dealers compete with each other and, hence, have incentives to avoid sharing trading posts in order to maximize their rents. In equilibrium, however, the heterogeneity in traders' private valuations for the asset determines how the asset is traded. Assets for which traders' private valuations are relatively homogeneous, such as bonds, trade in fragmented markets. In contrast, assets for which traders' private valuations are more widely dispersed, such as stocks, trade in centralized markets. The model also has implications for liquidity and price dispersion.
    Date: 2014
  3. By: M. Alessandra Crisafi; Andrea Macrina
    Abstract: We consider a finite-horizon market-making problem faced by a dark pool that executes incoming buy and sell orders. The arrival flow of such orders is assumed to be random and, for each transaction, the dark pool earns a per-share commission no greater than the half bid-ask spread. Throughout the entire period, the main concern is inventory risk, which increases as the number of held positions becomes critically small or large. The dark pool can control its inventory by choosing the size of the commission for each transaction, so to encourage, e.g., buy orders instead of sell orders. Furthermore, it can submit lit-pool limit orders, of which execution is uncertain, and market orders, which are expensive. In either case, the dark pool risks an information leakage, which we model via a fixed penalty for trading in the lit pool. We solve a double-obstacle impulse-control problem associated with the optimal management of the inventory, and we show that the value function is the unique viscosity solution of the associated system of quasi variational inequalities. We explore various numerical examples of the proposed model, including one that admits a semi-explicit solution.
    Date: 2015–02
  4. By: Dennis, Patrick J. (McIntire School of Commerce, University of Virginia); Sandås, Patrik (McIntire School of Commerce, University of Virginia)
    Abstract: Anonymous trading is the norm in today's financial markets but there are a few exceptions. We study one such case, the OMX Nordic Exchanges (Stockholm, Helsinki, Copenhagen, and Reykjavik) that have traditionally been more transparent than most other markets. On June 2, 2008 OMX Nordic switched to making post-trade reporting anonymous for some of their markets. We exploit this quasinatural experiment to investigate the impact this change had on liquidity and trading behavior. Our difference-in-difference method reveals a modest, though statistically insignificant, 14 basis point improvement in the quoted spread under the post-trade anonymous regime. The price impact of a trade decreased by a statistically significant four basis points for seller-initiated trades and did not change for buyer-initiated trades.
    Keywords: Anonymity; Transparency; Liquidity; Broker ID
    JEL: G10 G14 G15
    Date: 2014–10–01
  5. By: Fabrice Rousseau (Department of Economics, Finance and Accounting, National University of Ireland, Maynooth); Hervé Boco (Toulouse University, Toulouse Business School, France); Laurent Germain (Toulouse University, Toulouse Business School, France)
    Abstract: This paper analyzes a multi-auction setting in which informed strategic agents are endowed with heterogeneous noisy signals about the liquidation value of a risky asset. One result is that when the variance of the noise is small the competition between traders takes the form of a rat race during all the periods of trading. As we increase the level of the noise in the traders’ signals, a waiting game phase appears and the intensity of the rat race, observed only at the last auctions, decreases. In sharp contrast with the previous literature, when the variance of the noise is very large, we only observe a waiting game.
    Keywords: efficiency, asymmetric information, noise, liquidity, adverse selection, competition

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