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on Market Microstructure |
| By: | Robert P. Bartlett, III; Justin McCrary |
| Abstract: | Using over eight trillion observations of market data, we use a regression discontinuity design to analyze the effect of increasing the minimum price variation (MPV) for quoting equity securities in light of recent proposals to increase the MPV from $0.01 to $0.05. We show that a larger MPV encourages investors to trade in dark venues at the midpoint of the national best bid and offer. Enhanced order flow to dark venues reduces price competition by exchange liquidity providers, especially those using high frequency trading (HFT). Trading in dark venues due to a wider MPV reduces volatility and increases trading volume. |
| JEL: | G10 G15 G18 G23 G28 K22 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21286&r=mst |
| By: | Gissler, Stefan (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | A V-shaped price pattern is often observed in financial markets - in response to a negative shock, prices fall "too far" before reversing course. This paper looks at one particular channel of such patterns: the link between a liquidity provider's balance sheet and asset prices. I examine a well-identified historical case study where a large exogenous shock to a liquidity provider's balance sheet resulted in severe capital constraints. Using evidence from German universal banks, who acted as market makers for selected stocks in the interwar period, I show in a difference-in-differences framework that binding capital constraints made stocks 15-20 percent more likely to be illiquid if they were connected to the distressed liquidity provider. This resulted in V-shaped price patterns during times of illiquidity, where prices declined on average 2.5 percent and reversed over the next one to three days. Investing in these particular stocks would have yielded substantial gains. These findings can be rationalized by a model that incorporates imperfect competition and asymmetric information. Under this model, banks' market-making reduces price volatility (and uninformed traders' reactions to price movements) in normal times whereas in distressed times, the price impact of noise trading is high and leads to sharp price declines that are unrelated to fundamentals. |
| Keywords: | Asset pricing and bonds; banks; credit unions; other financial institutions; economic history; equity; liquidity |
| Date: | 2015–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-43&r=mst |
| By: | Nefedova, Tamara; Parise, Gianpaolo; Eisele, Alexander |
| Abstract: | This paper exploits institutional trade level data to study cross-trading activity inside mutual fund families. Cross-trades are opposite trades matched between siblings (i.e., funds belonging to the same fund family) without going to the open market. We find that large fund families with weak governance and high within family size dispersion cross-trade more and are more likely to misprice their cross-trades. Additionally, we find that cross-trades are used to increase the performance of the most valuable siblings (on average by 2.5% per annum) at the expense of the less valuable funds. More restrictive governance policies introduced as a consequence of the late trading scandal were effective in reducing the amount and the mispricing of cross-trades. |
| Keywords: | Cross-trading; Performance; Governance; Mutual Fund Families; |
| JEL: | G34 L25 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/15218&r=mst |
| By: | Stenzel, André; Wagner, Wolf |
| Abstract: | We present a model that links the opacity of an asset to its liquidity. While low opacity assets are liquid, intermediate levels of opacity provide incentives for investors to acquire private information, causing adverse selection and illiquidity. High opacity, however, benefits liquidity by reducing the value of a unit of private information to investors. The cross-section of bid-ask spreads of U.S. firms is shown to be consistent with this hump-shape relationship between opacity and illiquidity. The analysis suggests that uniform disclosure requirements may not be desirable; optimal information provision can be achieved by subsidizing information. The model also delivers predictions about when it is optimal for asset originators to sell intransparent products or pools composed of correlated assets. |
| Keywords: | asset liquidity; endogenous information acquisition; opacity |
| JEL: | D82 G14 G18 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10665&r=mst |
| By: | Paolo Guasoni; Mikl\'os R\'asonyi |
| Abstract: | In a continuous-time model with multiple assets described by c\`{a}dl\`{a}g processes, this paper characterizes superhedging prices, absence of arbitrage, and utility maximizing strategies, under general frictions that make execution prices arbitrarily unfavorable for high trading intensity. Such frictions induce a duality between feasible trading strategies and shadow execution prices with a martingale measure. Utility maximizing strategies exist even if arbitrage is present, because it is not scalable at will. |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1506.05895&r=mst |
| By: | Brunekreeft, Gert |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esrepo:111268&r=mst |
| By: | Nabe, Christian; Neuhoff, Karsten |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esrepo:111265&r=mst |
| By: | Oggioni, Giorgia; Lanfranconi, Cristian |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esrepo:111267&r=mst |
| By: | Konstantinidis, Christos; Strbac, Goran |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esrepo:111266&r=mst |