nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒09‒26
five papers chosen by
Thanos Verousis

  1. Competition between high-frequency traders, and market quality By Breckenfelder, Johannes
  2. Dealer spreads in the corporate bond market: Agent vs. market-making roles By Ederington, Louis; Guan, Wei; Yadav, Pradeep K.
  3. Are retail traders compensated for providing liquidity? By Barrot, Jean-Noël; Kaniel, Ron; Sraer, David
  4. Economic Activity and the Spread of Viral Diseases: Evidence from High Frequency Data By Adda, Jérôme
  5. Government ownership, informed trading, and private information By Borisova, Ginka; Yadav, Pradeep K.

  1. By: Breckenfelder, Johannes
    Abstract: This is the first empirical evidence on the competition between high-frequency traders (HFTs) and its influence on market quality. We exploit the first entries of international HFTs into the Swedish equity market in 2009 and conduct a difference-in-differences analysis using trade-by-trade data. To further identify the effect, we use the Federation of European Securities Exchanges (FESE) tick size harmonization as an exogenous event that caused HFTs to start trading in stocks. When HFTs compete for trades their liquidity consumption increases. As a result, liquidity deteriorates significantly and short-term volatility rises.
    Keywords: competition, high-frequency trading, tick size harmonization, FESE, changes in competition
    JEL: G11 G12 G14 G21 G23
    Date: 2013–03
  2. By: Ederington, Louis; Guan, Wei; Yadav, Pradeep K.
    Abstract: Utilizing subsets of trades in which dealers act purely as agents, purely as market-makers, and as both, we decompose dealer spreads in U.S. corporate bond OTC markets into components arising from: 1) dealers' marketmaking role, and 2) their role as agents for their non-dealer customers. We find that agent-related spreads are large and comparable in magnitude to market-making spreads. In their role as agents, dealers face liquidity-search and customer interface costs, while in their role as market makers they face inventory and asymmetric information costs. Consistent with this, we find that while market-making spreads are strongly correlated with market risk variables, agent-related spreads are not, depending instead on liquidity driven variables. While market-making spreads are inversely related to trade size, agent-related spreads increase with trade size before leveling off and then declining - possibly indicating that agent-dealers devote less search time to relatively small trades. Market makers trade both with dealers functioning as agents and directly with investors; our evidence indicates that market makers derive an information benefit from direct interaction with traders especially when risk and information asymmetry is high. Except for very small trades, explicit transaction costs of non-dealer customers are lower when they trade directly with market-making dealers than when they route trades through a dealer acting purely as an agent. Our evidence indicates that bond traders tend to employ agent-dealers when the cost of the agent is low relative to the trader's internal search costs. Finally, we show that many existing studies have underestimated average overall trading costs in the corporate bond market by failing to account for both the agentdealer spread and market-making dealer spread on trades which involve both. Given our findings on the size and economic determinants of agent-related dealer costs, our results have significant implications for the extensive empirical literature on dealer spreads in other OTC markets.
    Keywords: Dealer Spreads,Market-Making Costs,Search Costs
    JEL: G10 G14 G18
    Date: 2015
  3. By: Barrot, Jean-Noël; Kaniel, Ron; Sraer, David
    Abstract: This paper examines the extent to which individual investors provide liquidity to the stock market and whether they are compensated for doing so. We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is significantly enhanced during times of market stress, when market liquidity provisions decline. While a weekly rebalanced portfolio long in stocks purchased and short in stocks sold by retail investors delivers 19% annualized excess returns over a four-factor model from 2002 to 2010, it delivers up to 40% annualized returns in periods of high uncertainty. Despite this high aggregate performance, individual investors do not reap the rewards from liquidity provision because they experience a negative return on the day of their trade and they reverse their trades long after the excess returns from liquidity provision are dissipated. During the financial crisis, French active retail stock traders stepped up to the plate, increased stock holdings, and provided liquidity. In contrast, mutual fund investors fled from delegation by selling their mutual funds.
    Keywords: crisis; liquidity; retail investors
    JEL: G01 G11 G14
    Date: 2015–09
  4. By: Adda, Jérôme (Bocconi University)
    Abstract: Viruses are a major threat to human health, and - given that they spread through social interactions - represent a costly externality. This paper addresses three main issues: i) what are the unintended consequences of economic activity on the spread of infections? ii) how efficient are measures that limit interpersonal contacts? iii) how do we allocate our scarce resources to limit their spread? To answer these questions, we use novel high frequency data from France on the incidence of a number of viral diseases across space, for different age groups, over a period of a quarter of a century. We use quasi-experimental variation to evaluate the importance of policies reducing inter-personal contacts such as school closures or the closure of public transportation networks. While these policies significantly reduce disease prevalence, we find that they are not cost-effective. We find that expansions of transportation networks have significant health costs in increasing the spread of viruses and that propagation rates are pro-cyclically sensitive to economic conditions and increase with inter-regional trade.
    Keywords: health, epidemics, spatial diffusion, transportation networks, public policy
    JEL: I12 I15 I18 H51 C23
    Date: 2015–09
  5. By: Borisova, Ginka; Yadav, Pradeep K.
    Abstract: We investigate the nature and extent of information asymmetry among traders in companies with government ownership. Consistent with a less transparent information environment, we find relatively less informed trading in the shares of firms with government presence, and specifically, fewer informed trades related to the skilled analysis of public information. At the same time, we also find that firms with government presence have a significantly higher proportion of informed trading that arises from explicitly private information, consistent with the literature on the self-serving influence of government stakeholders not necessarily committed to maximizing firm value.
    Keywords: Government ownership,Privatization,Information asymmetry,Informed trading,Private information
    JEL: G32 D82 L33
    Date: 2015

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