nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒06‒09
five papers chosen by
Thanos Verousis

  1. Who supplies liquidity, how and when? By Bruno Biais; Fany Declerck; Sophie Moinas
  2. Intraday Markets for Power: Discretizing the Continuous Trading By Karsten Neuhoff; Nolan Ritter; Aymen Salah-Abou-El-Enien; Philippe Vassilopoulos
  3. The offshore renminbi exchange rate: Microstructure and links to the onshore market By Cheung, Yin-Wong; Rime, Dagfinn
  4. The Strategic Determination of the Supply of Liquid Assets By Athanasios Geromichalos; Lucas Herrenbrueck
  5. Price Efficiency in U.S. Water Rights Markets By Rimsaite, Renata; Fisher-Vanden, Karen A.; Olmstead, Sheila M.

  1. By: Bruno Biais; Fany Declerck; Sophie Moinas
    Abstract: Who provides liquidity in modern, electronic limit order book, markets? While agency trading can be constrained by conflicts of interest and information asymmetry between customers and traders, prop traders are likely to be less constrained and thus better positioned to carry inventory risk. Moreover, while slow traders' limit orders may be exposed to severe adverse selection, fast trading technology can improve traders' ability to monitor the market and avoid being picked off. To shed light on these points, we rely on unique data from Euronext and the AMF, the French financial markets regulator, enabling us to observe the connectivity of traders to the market, and whether they are proprietary traders. We find that proprietary traders, be they fast or slow, provide liquidity with contrarian marketable orders, thus helping the market absorb shocks, even during a crisis, and they earn profits while doing so. Moreover, fast traders provide liquidity by leaving limit orders in the book. Yet, only prop traders can do so without making losses. This suggests that technology is not enough to overcome adverse selection; monitoring incentives are also needed.
    Keywords: Liquidity, high-frequency trading, proprietary trading, adverse selection, electronic limit order book, short-term momentum, contrarian
    Date: 2016–05
  2. By: Karsten Neuhoff; Nolan Ritter; Aymen Salah-Abou-El-Enien; Philippe Vassilopoulos
    Abstract: A fundamental question regarding the design of electricity markets is whether adding auctions to the continuous intraday trading is improving the performance of the market. To approach this question, we assess the experience with the implementation of the 3 pm local auction for quarters in Germany at the European Power Exchange (EPEX SPOT) in December 2014 to assess the impact on trading volumes/liquidity, prices, as well as market depth. We discuss further opportunities and challenges that are linked with a potential implementation of an intraday auction.
    Keywords: auctions, electricity, empirical analysis, market design
    JEL: C5 C57 C93 D44 D47 L50
    Date: 2016–03–21
  3. By: Cheung, Yin-Wong; Rime, Dagfinn
    Abstract: The offshore renminbi (CNH) exchange rate is the exchange rate of the Chinese currency transacted outside China. We study the CNH exchange rate dynamics and its links with onshore exchange rates. Using a specialized microstructure dataset, we find that CNH is significantly affected by its order flow and limit-order imbalance. The offshore CNH exchange rate has an increasing impact on the onshore rate, and significant predictive power for the official RMB central parity rate. The CNH order flow also affects the onshore RMB exchange rate and the central parity rate. The interactions between variables are likely to be time-varying. Publication keywords: foreign exchange market microstructure, order flow, limit-order imbalance, CNH, CNY, central parity rate
    JEL: F31 F33 G14 G15 G21 G28
    Date: 2014–09–28
  4. By: Athanasios Geromichalos; Lucas Herrenbrueck (Department of Economics, University of California Davis)
    Abstract: We study how the strategic interaction of liquid-asset suppliers depends on the financial market conditions that determine asset liquidity. In our model, two asset suppliers try to profit from the liquidity services their assets confer. Asset liquidity is indirect in the sense that assets can be sold for money in over-the-counter (OTC) secondary markets. These secondary markets are segmented and customers will be drawn to the market where they expect to find the best terms. Understanding this, asset-suppliers play a differentiated Cournot game, where product differentiation here stems from differences in OTC microstructure. We find that small differences in OTC microstructure can induce very large differences in the relative liquidity of two assets. Asset demand curves can slope upward for evenmodest degrees of increasing returns in the matching technology. And if one asset supplier has an exogenous advantage over another, the favored agent may want to strategically increase asset supply for the purpose of driving competitors out of the secondary market altogether.
    Keywords: monetary-search models, liquidity, OTC markets, endogenous asset supply
    JEL: E31 E43 E52 G12
    Date: 2016–05–25
  5. By: Rimsaite, Renata; Fisher-Vanden, Karen A.; Olmstead, Sheila M.
    Abstract: With this study we seek to understand the relationship between the sale and one-year lease prices in the U.S. water rights market. Given that the majority of current water rights markets in the U.S. are informal, high in transaction costs, and heterogeneous within and across states, we do not expect for the asset pricing theory to completely explain high variation in prices. Our goal is to understand which part of the pricing can be explained by the arbitrage theory and which part should be attributed to the expectations about the future conditions. Using a unique water rights trading dataset, which consists of water rights sales and one-year leases in six U.S. western states between 1994 and 2007, we follow the Newell et al. (2007) approach applied to New Zealand fisheries, and econometrically analyze the applicability of a present-value asset pricing model to the water rights markets. Our preliminary results show that the asset pricing theory holds in water rights markets, and support our hypothesis that the U.S. water rights market is less efficient than the fishing quota market in New Zealand. We further analyze what policies lead to different water rights pricing mechanisms across and within the studied states.
    Keywords: Water rights markets, price efficiency, asset pricing, water institutions, climate change., Environmental Economics and Policy, Q21, Q25, Q28, Q54,
    Date: 2016

This nep-mst issue is ©2016 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.