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on Market Microstructure |
| By: | Carlos Lenczewski (Warsaw School of Economics, Banking and Commercial Insurance Institute) |
| Abstract: | This paper presents a review of the literature on high-frequency traders and their presence in the microstructure analysis of the foreign exchange, and how they fall under the determinants of the bid-ask spread of foreign exchange rates. The bid-ask spread is one of the key elements of the microstructure approach in the foreign exchange market. Understood as the difference between the price a participant buys the base currency and the price for which the participant sells that same currency. The understanding of what affects spread is important to assess dealers rent, price fairness and transparency and for transaction costs both in trading systems and settlement systems. It is shown, that algorithmic trading, and for that high-frequency traders, do not have a negative role in volatility, and are not a reason for widening bid-ask spreads. In fact, evidence shows that their presence is a key factor in the spreads being more narrow. |
| Keywords: | high-frequency trading, spread, foreign exchange, microstructure |
| JEL: | F31 G15 D23 |
| Date: | 2016–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:eus:wpaper:ec0116&r=mst |
| By: | Alexander Eisele; Tamara Nefedova; Gianpaolo Parise |
| Abstract: | vThe majority of financial trades take place in open and highly regulated markets. As an alternative venue, large asset managers sometimes offset the trades of affiliated funds in an internal market, without relying on external facilities or supervision. In this paper, we employ institutional trade-level data to examine such cross-trades. We find that cross-trades used to display a spread of 46 basis points with respect to open market trades before more restrictive regulation was adopted. The introduction of tighter supervision decreased this spread by 59 basis points, bringing the execution price of cross-trades below that of open market trades. We additionally find that cross-trades presented larger deviations from benchmark prices when the exchanged stocks were illiquid and highly volatile, during high financial uncertainty times, and when the asset manager had weak governance, large internal markets, and a strong incentive for reallocating performance. Finally, we provide evidence suggesting that cross-trades are more likely than open-market trades to be executed exactly at the highest or lowest price of the day, consistent with the ex post setting of the price. Our results are consistent with theoretical models of internal capital markets in which the headquarters actively favors its "stars" at the expense of the least valuable units. |
| Keywords: | mutual funds, cross-trading, performance shifting, conflict of interests |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:577&r=mst |
| By: | Laura Veldkamp (New York University Stern School of Busi); Maryam Farboodi (Princeton University) |
| Abstract: | As the financial sector has swollen in size, the nature of its activities has shifted and investors have taken ever larger bets on its outcomes. The financial sector should add value by processing information, evaluating risks, disseminating that information through advising or road shows, and ultimately, using the information to allocate capital. Over time, the nature of the information processed and transmitted has changed. While financial analysis used to mean fundamental analysis of an asset's long-run value, perhaps combined with some statistical exploration of recent price trends, more recently, focus has shifted to mining order flow data to identify promising times at which to trade. We build a model that explores the reason for this analysis shift, offers testable predictions to help determine the extent of the shift, and clarifies the consequences for the real economy. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:530&r=mst |
| By: | Caroline Fohlin; Thomas Gehrig; Marlene Haas |
| Abstract: | Using a new daily dataset for all stocks traded on the New York Stock Exchange between 1905 and 1910, we study the impact of information asymmetry during the liquidity freeze and market run of October 1907 - one of the most severe financial crises of the twentieth century. We estimate that the market drove up spreads from 0.5 percent to 3 percent during the peak of the crisis and, using a spread decomposition, we identify information risk as the largest component of illiquidity. Information costs rose most in the mining sector - the origin of the stock corner and a sector with among the worst track records of corporate governance and accounting. We find other hallmarks of information-based illiquidity: trading volume dropped and price impact rose. Despite short-term cash infusions into the market, the market remained relatively illiquid for several months following the peak of the panic. Notably, market illiquidity risk is priced in the cross-section of stock returns. Thus, our findings demonstrate how opaque systems allow idiosyncratic rumors to spread and amplify into a long-lasting market-wide crisis. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:1605&r=mst |