nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒10‒02
seven papers chosen by
Thanos Verousis

  1. Low-latency trading and price discovery: Evidence from the Tokyo Stock Exchange in the pre-opening and opening periods By Bellia, Mario; Pelizzon, Loriana; Subrahmanyam, Marti G.; Uno, Jun; Yuferova, Darya
  2. Relative liquidity and future volatility By Marcela Valenzuela; Ilknur Zer; Piotr Fryzlewicz; Thorsten Rheinlander
  3. Size Discovery By Duffie, Darrell; Zhu, Haoxiang
  4. The stock market effects of a securities transaction tax: quasi-experimental evidence from Italy By Cappelletti, Giuseppe; Guazzarotti, Giovanni; Tommasino, Pietro
  5. Dual Decision Processes and Noise Trading By Francesco Cerigioni
  6. The Downside of Asset Screening for Market Liquidity By Vanasco, Victoria
  7. Taking Orders and Taking Notes: Dealer Information Sharing in Treasury Markets By Boyarchenko, Nina; Lucca, David O; Veldkamp, Laura

  1. By: Bellia, Mario; Pelizzon, Loriana; Subrahmanyam, Marti G.; Uno, Jun; Yuferova, Darya
    Abstract: We study whether the presence of low-latency traders (including high-frequency traders (HFTs)) in the pre-opening period contributes to market quality, defined by price discovery and liquidity provision, in the opening auction. We use a unique dataset from the Tokyo Stock Exchange (TSE) based on server-IDs and find that HFTs dynamically alter their presence in different stocks and on different days. In spite of the lack of immediate execution, about one quarter of HFTs participate in the pre-opening period, and contribute significantly to market quality in the pre-opening period, the opening auction that ensues and the continuous trading period. Their contribution is largely different from that of the other HFTs during the continuous period.
    Keywords: High-Frequency Traders (HFTs),pre-opening,opening call auction,price discovery,liquidity provision
    JEL: G12 G14
    Date: 2016
  2. By: Marcela Valenzuela; Ilknur Zer; Piotr Fryzlewicz; Thorsten Rheinlander
    Abstract: The main contribution of this paper is to identify the strong predictive power of the relative, rather than the absolute, volume of orders over volatility. To this end, we propose a new measure, relative liquidity, which accounts for how quoted depth is distributed in a limit order book and captures the level of consensus on a security's trading price. Higher liquidity provision farther away from the best quotes, relative to the rest of the book, is associated with a disagreement on the current price and followed by high volatility. The relationship is robust to the inclusion of several alternative measures.
    Keywords: Order-driven markets; limit order book distribution; volatility predictability; liquidity
    JEL: G1 G20
    Date: 2015
  3. By: Duffie, Darrell (Stanford University); Zhu, Haoxiang (MIT)
    Abstract: Size discovery is the use of trade mechanisms by which large quantities of an asset can be exchanged at a price that does not respond to price pressure. Primary examples of size discovery include "workup" in Treasury markets, "matching sessions" in corporate bond and CDS markets, and block-trading "dark pools" in equity markets. By freezing the execution price and giving up on market-clearing, a size-discovery mechanism overcomes large investors' concerns over price impacts. Price-discovery mechanisms clear the market, but cause investors to internalize their price impacts, inducing costly delays in the reduction of position imbalances. We show how augmenting a price-discovery mechanism with a size-discovery mechanism improves allocative efficiency.
    JEL: D47 D82 G14
    Date: 2016–07
  4. By: Cappelletti, Giuseppe; Guazzarotti, Giovanni; Tommasino, Pietro
    Abstract: We study the effects on the stock market of a securities transaction tax (STT). In particular, we focus on the recent introduction of a STT in Italy. Indeed, a peculiarity of the Italian STT is that it only concerns stocks of corporations with a market capitalization above 500 million euros. We exploit this feature via a differences-in-differences approach (comparing taxed and non-taxed stocks both before and after the introduction of the new tax). We ?find that the new tax widened the bid-ask spread and increased volatility, while it left transaction volumes and returns substantially unaffected. Results are broadly similar using a regression discontinuity design, in which we confront the performance of stocks just above the threshold with those just below. JEL Classification: G14, G18, H24
    Keywords: market liquidity, market volatility, securities transaction tax
    Date: 2016–08
  5. By: Francesco Cerigioni
    Abstract: Evidence from financial markets suggests that asset prices can be consistently far from their funda-mental value. Prices seem to underreact to news in the short-run and overreact in the long-run. In this paper, we use Dual Process Theory to describe traders behavior. In particular, a part of traders holds wrong beliefs anytime the market environment does not change sufficiently. The proportion of traders with wrong beliefs will depend on how similar past market environments are with the present one. We show that such model not only can be seen as a way of endogenizing noise trading, but also provides a justification for noise traders’ beliefs and it shows that underreaction and overreaction naturally arise in such framework. Finally, we discuss how the model might help understanding the emergence of the equity-premium puzzle and its variation through time.
    Keywords: asset pricing, Dual Processes, noise trading, underreaction, overreaction, equity-premium puzzle
    JEL: G02 G11 G12
    Date: 2016–09
  6. By: Vanasco, Victoria (Stanford University)
    Abstract: This paper explores the tension between asset quality and liquidity in a model where an originator exerts effort to screen assets, whose cash flows can be later sold in secondary markets. Screening improves asset quality, but introduces a problem of asymmetric information that may hinder trade. In the optimal mechanism, costly retention of cash flows is essential to implement positive effort. Market allocations can feature too-much or too-little effort relative to the second best, where over-exertion comes with inefficiently illiquid markets. When gains from trade are large, markets are prone to multiple equilibria. The optimal mechanism is decentralized with differential retention rules and transfers across markets.
    Date: 2016–04
  7. By: Boyarchenko, Nina; Lucca, David O; Veldkamp, Laura
    Abstract: The use of order flow information by financial firms has come to the forefront of the regulatory debate. A central question is: Should a dealer who acquires information by taking client orders be allowed to use or share that information? We explore how information sharing affects dealers, clients and issuer revenues in U.S. Treasury auctions. Because one cannot observe alternative information regimes, we build a model, calibrate it to auction results data, and use it to quantify counter-factuals. We estimate that yearly auction revenues with full-information sharing (with clients and between dealers) would be $5 billion higher than in a "Chinese Wall'' regime in which no information is shared. When information sharing enables collusion, the collusion costs revenue, but prohibiting information sharing costs more. For investors, the welfare effects of information sharing depend on how information is shared. Surprisingly, investors benefit when dealers share information with each other, not when they share more with clients. For the market, when investors can bid directly, information sharing creates a new financial accelerator: Only investors with bad news bid through intermediaries, who then share that information with others. Thus, sharing amplifies the effect of negative news. Tests of two model predictions support its key features.
    Keywords: asymmetric information; auctions; Financial Intermediation; Treasury
    Date: 2016–09

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