nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒03‒05
seven papers chosen by
Thanos Verousis

  1. Interactions among high-frequency traders By Benos, Evangelos; Brugler, James; Hjalmarsson , Erik; Zikes , Filip
  2. Strategic Trading in Informationally Complex Environments By Lambert, Nicolas; Ostrovsky, Michael; Panov, Mikhail
  3. Commonality in Liquidity: What does the order book say? By Ahmet Sensoy
  4. Equilibrium Fast Traders By Thierry Foucault; Sophie Moinas; Bruno Biais
  5. The liquidity of dual-listed corporate bonds: empirical evidence from Italian markets By MODENA, MATTEO; LINCIANO, NADIA; GENTILE, MONICA; FANCELLO, FRANCESCO
  6. Insider Trading in the Bond Market: Evidence from Loan Sale Events By Massa, Massimo; Schmidt, Daniel
  7. Information Acquisition vs. Liquidity in Financial Markets By Vanasco, Victoria

  1. By: Benos, Evangelos (Bank of England); Brugler, James (University of Cambridge, Faculty of Economics); Hjalmarsson , Erik (University of Gothenburg, Department of Economics); Zikes , Filip (Bank of England)
    Abstract: Using unique transactions data for individual high-frequency trading (HFT) firms in the UK equity market, we examine if the trading activity of individual HFT firms is contemporaneously and dynamically correlated with each other, and what impact this has on price efficiency. We find that HFT order flow exhibits significantly higher commonality than the order flow of a control group of investment banks, both within and across stocks. However, intraday HFT order flow commonality is associated with a permanent price impact, suggesting that commonality in HFT activity is information-based and so does not generally contribute to undue price pressure and price dislocations.
    Keywords: High-frequency trading; correlated trading strategies; price discovery
    JEL: G10 G12 G14
    Date: 2015–02–20
  2. By: Lambert, Nicolas (Stanford University); Ostrovsky, Michael (Stanford University); Panov, Mikhail (Stanford University)
    Abstract: We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of Kyle (1985). We allow for essentially arbitrary correlations among the random variables involved in the model: the true value of the traded asset, the signals of strategic traders, the signals of competitive market makers, and the demand coming from liquidity traders. We first show that there always exists a unique linear equilibrium, which can be characterized analytically, and illustrate its properties in a series of examples. We then use this equilibrium characterization to study the informational eciency of prices as the number of strategic traders becomes large. If the demand from liquidity traders is uncorrelated with the true value of the asset or is positively correlated with it (conditional on other signals), then prices in large markets aggregate all available information. If, however, the demand from liquidity traders is negatively correlated with the true value of the asset, then prices in large markets aggregate all available information except that contained in liquidity demand.
    Date: 2014–01
  3. By: Ahmet Sensoy
    Abstract: Taking the cost of trading as a liquidity proxy, we provide evidence of commonality in liquid- ity and look for sources of it in an emerging market, Turkey. We show that the commonality in non-index stocks is higher than the commonality in index stocks. As the position size to trade increases, the strength of commonality is preserved for the former, however it decreases for the latter, which is argued to depend on the dierences in the behaviors of individual and institutional investors. Regarding non-index stocks, we also reveal that buy side liquidity has a stronger commonality than sell side liquidity for small positions to trade, whereas it is the opposite case for large trading positions, a possible outcome of the individual investors' positive bias towards recent market performance. Further analysis on ownership eect shows that for mid-to-large cap rms, institutional investors are the main source of commonality in liquidity as expected, whereas individual investors are the main in uence on commonality for small cap rms. A time varying perspective reveals that among several domestic and global macro-economic variables, liquidity commonality is signicantly aected only by the interest rate decisions and GDP announcements of U.S.; and it tends to increase when the market is falling and/or volatile.
    Keywords: Liquidity commonality, cost of trading, index trading, ownership structure, macro-announcements
    Date: 2015–02
  4. By: Thierry Foucault (HEC, Paris); Sophie Moinas (TSE (Toulouse University)); Bruno Biais (Université de Toulouse 1 Capitole)
    Abstract: High-speed market connections and information processing improve financial institutions' ability to seize trading opportunities, which raises gains from trade. They also enable fast traders to process information before slow traders, which generates adverse selection. We first analyze trading equilibria for a given level of investment in fast-trading technology and then endogenize this level. Investments can be strategic substitutes or complements. In the latter case, investment waves can arise, where institutions invest in fast-trading technologies just to keep up with the others. When some traders become fast, it increases adverse selection costs for all, i.e., it generates negative externalities. Therefore equilibrium investment can exceed its welfare maximizing counterpart.
    Date: 2014
    Abstract: We compute some indicators (zero-trade, turnover ratio, Amihud price impact, and Roll bid-ask spread) to examine the liquidity conditions of corporate bonds traded on the main Italian retail bond markets from January 2010 to June 2013. In order to compare market liquidity for identical securities, our analysis focuses on fragmented bonds, i.e. bonds traded concurrently on two different venues: either DomesticMOT and EuroTLX, or ExtraMOT and EuroTLX. As for bonds traded on DomesticMOT and EuroTLX, the Amihud and the Roll statistics suggest EuroTLX being more liquid. Moreover, irrespective of the trading venue, on average bank bonds are less liquid than bonds issued by non-financial companies, especially from 2011 due to the impact of the sovereign debt crisis. With regard to bonds traded across ExtraMOT and EuroTLX, the latter is characterized by better liquidity conditions, with bank bonds being more liquid than non-financial ones. Furthermore, we find evidence of better liquidity figures for Italian bonds (nationality), structured bonds (complexity), and securities with greater minimum trading size (MTS). We also find that bonds’ features (issuers’ nationality and industry; bonds’ residual maturity, complexity, rating, etc…) affect liquidity differently depending upon the trading venue, thus supporting the view that market microstructure may play a relevant role. Finally, we investigate the effect of fragmentation by comparing the liquidity of dual-listed bank bonds fragmented across DomesticMOT and EuroTLX with otherwise similar bank bonds traded exclusively on DomesticMOT. Italian fragmented bank bonds turn out to be slightly more liquid than similar Italian bonds traded exclusively on DomesticMOT; whereas, the opposite holds for foreign bank bonds. However, overall there is not a clear-cut evidence on the effect of fragmentation on bond liquidity, probably because it is intertwined with bonds’ attributes, such as the issue size (in our sample, higher for the Italian bank bonds).
    Keywords: liquidity risk, dual-listed bonds, corporate bonds, market microstructure
    JEL: G01 G10 G12 G18
    Date: 2014–10–15
  6. By: Massa, Massimo; Schmidt, Daniel
    Abstract: We investigate the pricing implications of the parallel trading of loans and bonds of the same firm. We show that loan, by making lenders share sensitive information about the borrower with the loan market participants, lower the information advantage of the asset managers affiliated to the lender who respond by reducing their stake in the bonds of the firm whose loans are sold, independently of considerations about the future firm value. This reduces information asymmetry in the bond market and improves its liquidity. This provides the first evidence of a direct informational link between the loan and bond secondary markets.
    Keywords: Corporate Bonds; Information Asymmetry; Loan Trading
    JEL: G14 G21 G22 G23 G24
    Date: 2015–03
  7. By: Vanasco, Victoria (Stanford University)
    Abstract: This paper presents a model of securitization that highlights the link between information acquisition at the loan screening stage and liquidity in markets where securities backed by loan cashflows are sold. While information is beneficial ex-ante when used to screen loans, it becomes detrimental ex-post because it introduces a problem of adverse selection. The model matches key features of the securitization practice, such as the tranching of loan cashflows, and it predicts that when gains from securitization are 'sufficiently' large, loan screening is inefficiently low. There are two channels that drive this inefficiency. First, when gains from trade are large, a loan issuer is tempted ex-post to sell a large portion of its cashflows, and lower retention reduces incentives to screen loans. Second, the presence of adverse selection in secondary markets creates informational rents for issuers holding low quality loans, reducing the value of loan screening. This suggests that incentives for loan screening not only depend on the portion of loans retained by issuers, but also on how the market prices different securities. Turning to financial regulation, I characterize the optimal mechanism and show that it can be implemented with a simple tax scheme. This paper, therefore, contributes to the recent debate on how to regulate securitization.
    Date: 2014–11

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