nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒02‒12
five papers chosen by
Thanos Verousis

  1. Limit-order book resiliency after effective market orders: Empirical facts and applications to high-frequency trading By Hai-Chuan Xu; Wei Chen; Xiong Xiong; Wei Zhang; Wei-Xing Zhou
  2. A Tale of Two Consequences By Ravi Kashyap
  3. Need for Speed? Exchange Latency and Liquidity By Albert Menkveld; Marius Andrei Zoican
  4. Should dark PoolS be banned from regulated exchangeS? By Nathalie Oriol; Alexandra Rufini; Dominique Torre
  5. The Estimation of Continuous Time Models with Mixed Frequency Data By Chambers, Marcus J

  1. By: Hai-Chuan Xu; Wei Chen; Xiong Xiong; Wei Zhang; Wei-Xing Zhou
    Abstract: In order-driven markets, limit-order book (LOB) resiliency is an important microscopic indicator of market quality when the order book is hit by a liquidity shock and plays an essential role in the design of optimal submission strategies of large orders. However, the evolutionary behavior of LOB resilience around liquidity shocks is not well understood empirically. Using order flow data sets of Chinese stocks, we quantify and compare the LOB dynamics characterized by the bid-ask spread, the LOB depth and the order intensity surrounding effective market orders with different aggressiveness. We find that traders are more likely to submit effective market orders when the spreads are relatively low, the same-side depth is high, and the opposite-side depth is low. Such phenomenon is especially significant when the initial spread is 1 tick. Although the resiliency patterns show obvious diversity after different types of market orders, the spread and depth can return to the sample average within 20 best limit updates. The price resiliency behavior is dominant after aggressive market orders, while the price continuation behavior is dominant after less-aggressive market orders. Moreover, the effective market orders produce asymmetrical stimulus to limit orders when the initial spreads equal to 1 tick. Under this case, effective buy market orders attract more buy limit orders and effective sell market orders attract more sell limit orders. The resiliency behavior of spread and depth is linked to limit order intensity. Finally, we present applications for high-frequency arbitrage based on LOB resiliency analysis and find that both long and short arbitrage strategies we design can achieve significantly positive returns.
    Date: 2016–02
  2. By: Ravi Kashyap
    Abstract: We look at the effect of the tick size changes on the TOPIX 100 index names made by the Tokyo Stock Exchange on Jan-14-2014 and Jul-22-2104. The intended consequence of the change is price improvement and shorter time to execution. We look at security level metrics that include the spread, trading volume, number of trades and the size of trades to establish whether this goal is accomplished. An unintended effect might be the reduction in execution sizes, which would then mean that institutions with large orders would have greater difficulty in sourcing liquidity. We look at a sample of real orders to see if the execution costs have gone up across the orders since the implementation of this change. We study the mechanisms that affect how securities are traded on an exchange, before delving into the specifics of the TSE tick size events. Some of the topics we explore are: The Venue Menu and How to Increase Revenue; To Automate or Not to Automate; Microstructure under the Microscope; The Price of Connections to High (and Faraway) Places; Speed Thrills but Kills; Pick a Size for the Perfect Tick; TSE Tick Size Experiments, Then and Now; Sergey Bubka and the Regulators; Bird`s Eye View; Deep Dive; Possibilities for a Deeper Dive; Does Tick Size Matter? Tick Size Does Matter!
    Date: 2016–02
  3. By: Albert Menkveld (VU University Amsterdam - VU University Amsterdam); Marius Andrei Zoican (DRM - Dauphine Recherches en Management - CNRS - Centre National de la Recherche Scientifique - Université Paris IX - Paris Dauphine)
    Abstract: Speeding up the exchange has a non-trivial effect on liquidity. On the one hand, more speed enables high-frequency market makers (HFMs) to update their quotes more quickly on incoming news. This reduces adverse-selection cost and lowers the competitive bid-ask spread. On the other hand, HFM price quotes are more likely to meet speculative high-frequency “bandits,” thus less likely to meet liquidity traders. This raises the spread. The net effect depends on a security’s news-to-liquidity-trader ratio. Empirical analysis of a NASDAQ-OMX speed upgrade shows that a faster market can indeed raise the spread and thus lower liquidity.
    Keywords: market microstructure,trading speed,information asymmetry,high frequency trading
    Date: 2016–01–11
  4. By: Nathalie Oriol (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS - Centre National de la Recherche Scientifique - UNS - Université Nice Sophia Antipolis); Alexandra Rufini (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS - Centre National de la Recherche Scientifique - UNS - Université Nice Sophia Antipolis); Dominique Torre (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS - Centre National de la Recherche Scientifique - UNS - Université Nice Sophia Antipolis)
    Abstract: European financial markets experiment a strong competition between historical players and new trading platforms, including the controversial dark pools. Our theoretical setting analyzes the interaction between heterogeneous investors and trading services providers in presence of market externalities. We compare different forms of organization of the market, each in presence of an off-exchange and an incumbent facing a two-sided activity (issuers and investors): a consolidated exchange with the incum- bent only, and fragmented exchanges with several platforms, including lit and dark pools, in competition for order ows. By capturing investors from off-exchange, dark trading may enhance market externalities and market stakeholders' welfare.
    Keywords: Microstructure, dark pools , Over-The-Counter market, liquidity, market externalities, two-sided markets
    Date: 2016–01–12
  5. By: Chambers, Marcus J
    Abstract: This paper derives exact representations for discrete time mixed frequency data generated by an underlying multivariate continuous time model. Allowance is made for different combinations of stock and flow variables as well as deterministic trends, and the variables themselves may be stationary or nonstationary (and possibly co-integrated). The resulting discrete time representations allow for the information contained in high frequency data to be utilised alongside the low frequency data in the estimation of the parameters of the continuous time model. Monte Carlo simulations explore the finite sample performance of the maximum likelihood estimator of the continuous time system parameters based on mixed frequency data, and a comparison with extant methods of using data only at the lowest frequency is provided. An empirical application demonstrates the methods developed in the paper and it concludes with a discussion of further ways in which the present analysis can be extended and refined.
    Keywords: Continuous time; mixed frequency data; exact discrete time models; stock and flow variables.
    Date: 2016

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