|
on Market Microstructure |
| By: | Onofrio Panzarino (Banca d'Italia); Francesco Potente (Banca d'Italia); Alfonso Puorro (Banca d'Italia) |
| Abstract: | The paper analyses the interactions between the ‘cash’ market (MTS Cash) and the futures market (Eurex) of Italian government bonds in terms of liquidity, price correlation and volatility. Based on daily data, the growth of the Eurex market seems to support the tightening of the bid-ask spread of MTS Cash, all things being equal, thus confirming a healthy and efficient link between cash and futures markets. Against this backdrop, a high frequency analysis highlights some episodes of partial divergence between price developments of futures and cash markets, which might be related to differences in the microstructures of the two markets. The futures market is order driven while the cash market is quote driven; furthermore different types of participants are active in each market. At higher frequencies, episodes of unidirectional propagation of volatility shocks from BTP futures to the MTS Cash market materialize, with potential spillovers on cash market liquidity conditions. In this regard, it is also important to consider the role played by High Frequency Traders, whose activity in futures markets may well contribute to explaining the peculiarities in price dynamics highlighted by high frequency data. |
| Keywords: | Market liquidity, HFT, volatility spillover, government bonds |
| JEL: | G12 G13 G14 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1083_16&r=mst |
| By: | Yergeau, Gabriel (HEC Montreal, Canada Research Chair in Risk Management) |
| Abstract: | Financial markets in contemporary regulatory settings require the presence of high-frequency liquidity providers. We present an applied study of the profitability and the impact on market quality of an individual high-frequency trader acting as a market-maker. Using a sample of sixty stocks over a six-month period, we implement the optimal quoting policy (OQP) of liquidity provision from Ait-Sahalia and Saglam's (2014) dynamic inventory management model. The OQP allows the high-frequency trader to extract a constant annuity from the market but its profitability is insufficient to cover the costs of market-making activities. The OQP is embedded in a trading strategy that relaxes the model’s constraint on the quantity traded. Circuit-breakers are implemented and market imperfections are considered. Profits excluding maker-fees and considering transaction fees are economically significant. We propose a methodology to adjust the returns for asynchronous trading and varying leverage levels associated with dynamic inventory management. This allows us to qualify high trade volume as a proxy of informed trading. The high-frequency trader behaves as a constant liquidity provider and has a positive effect on market quality even in periods of market stress. |
| Keywords: | Algorithmic trading; electronic markets; high-frequency trading; limit order book; liquidity; market-making; market efficiency; market microstructure. |
| JEL: | G10 G12 G14 |
| Date: | 2016–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2016_003&r=mst |
| By: | Gomber, Peter; Sagade, Satchit; Theissen, Erik; Weber, Moritz Christian; Westheide, Christian |
| Abstract: | The equity trading landscape all over the world has changed dramatically in recent years. We have witnessed the advent of new trading venues and significant changes in the market shares of existing ones. We use an extensive panel dataset from the European equity markets to analyze the market shares of five categories of lit and dark trading mechanisms. Market design features, such as minimum tick size, immediacy and anonymity; market conditions, such as liquidity and volatility; and the informational environment have distinct implications for order routing decisions and trading venues' resulting market shares. Furthermore, these implications differ distinctly for small and large trades, probably because traders jointly optimize their trade size and venue choice. Our results both confirm and go beyond current theoretical predictions on trading in fragmented markets. |
| Keywords: | Dark Trading,Fragmentation,Anonymity,Immediacy |
| JEL: | G10 G12 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1604&r=mst |
| By: | Israeli, Doron (Interdisciplinary Center, Herzliya); Lee, Charles M. C. (Stanford University); Sridharan, Suhas A. (UCLA) |
| Abstract: | In a noisy rational expectations framework with costly information, some agents expend resources to become informed, and earn a return for their efforts by trading with the uninformed. Applying this insight, we examine the proposition that an increase in ETF ownership is accompanied by a decline in pricing efficiency for the underlying component securities. Our tests show an increase in ETF ownership is associated with: (1) higher trading costs (measured as bid-ask spreads and price impact of trades); (2) an increase in "stock return synchronicity" (measured as the co-movement of firm-level stock returns with general market and related-industry stock returns); (3) a decline in "future earnings response coefficients" (measured as the predictive power of current returns for future earnings), and (4) a decline in the number of analysts covering the firm. Collectively, our findings support the view that increased ETF ownership can lead to higher trading costs and lower benefits from information acquisition, a combination which results in less informative security prices for the component firms. |
| JEL: | G11 G14 M41 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3322&r=mst |
| By: | Theissen, Erik; Westheide, Christian |
| Abstract: | Many equity markets employ designated market makers to supply additional liquidity for small and mid caps, and they use a hybrid trading system that combines continuous trading sessions and call auctions. We use data from Germany's Xetra system to analyze designated market maker activity in the call auctions. We find that their participation rates are negatively related to the liquidity of the stocks, that they are more active at times of elevated volatility, that they stabilize prices, and that they earn positive trading profits. These results imply that designated market makers provide a valuable service to the market, and that they charge an implicit price for that service. |
| Keywords: | Designated market makers,Call auctions |
| JEL: | G10 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1605&r=mst |
| By: | Mikkel Bennedsen; Asger Lunde; Mikko S. Pakkanen |
| Abstract: | We study the empirical properties of realized volatility of the E-mini S&P 500 futures contract at various time scales, ranging from a few minutes to one day. Our main finding is that intraday volatility is remarkably rough and persistent. What is more, by further studying daily realized volatility measures of more than five thousand individual US equities, we find that both roughness and persistence appear to be universal properties of volatility. Inspired by the empirical findings, we introduce a new class of continuous-time stochastic volatility models, capable of decoupling roughness (fine properties) from long memory and persistence (long-term behavior) in a simple and parsimonious way, which allows us to successfully model volatility at all intraday time scales. Our prime model is based on the so-called Brownian semistationary process and we derive a number of theoretical properties of this process, relevant to volatility modeling. Finally, in a forecasting study, we find that our new models outperform a wide array of benchmarks considerably, indicating that it pays off to exploit both roughness and persistence in volatility forecasting. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1610.00332&r=mst |
| By: | Kim Christensen (Aarhus University and CREATES); Roel Oomen (Deutsche Bank AG (London) and London School of Economics & Political Science (LSE) - Department of Statistics); Roberto Renò (Department of Economics, University of Verona) |
| Abstract: | The Drift Burst Hypothesis postulates the existence of short-lived locally explosive trends in the price paths of financial assets. The recent US equity and Treasury flash crashes can be viewed as two high profile manifestations of such dynamics, but we argue that drift bursts of varying magnitude are an expected and regular occurrence in financial markets that can arise through established mechanisms such as feedback trading. At a theoretical level, we show how to build drift bursts into the continuous-time Itô semi-martingale model in such a way that the fundamental arbitrage-free property is preserved. We then develop a non-parametric test statistic that allows for the identification of drift bursts from noisy high-frequency data. We apply this methodology to a comprehensive set of tick data and show that drift bursts form an integral part of the price dynamics across equities, fixed income, currencies and commodities. We find that the majority of identified drift bursts are accompanied by strong price reversals and these can therefore be regarded as “flash crashes” that span brief periods of severe market disruption without any material longer term price impacts. |
| Keywords: | flash crashes, drift bursts, volatility bursts, nonparametric statistics, reversals |
| JEL: | G10 C58 |
| Date: | 2016–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2016-28&r=mst |
| By: | Caroline Hillairet; Cody Hyndman; Ying Jiao; Renjie Wang |
| Abstract: | We consider trading against a hedge fund or large trader that must liquidate a large position in a risky asset if the market price of the asset crosses a certain threshold. Liquidation occurs in a disorderly manner and negatively impacts the market price of the asset. We consider the perspective of small investors whose trades do not induce market impact and who possess different levels of information about the liquidation trigger mechanism and the market impact. We classify these market participants into three types: fully informed, partially informed and uninformed investors. We consider the portfolio optimization problems and compare the optimal trading and wealth processes for the three classes of investors theoretically and by numerical illustrations. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1610.01937&r=mst |
| By: | Charles-Albert Lehalle; Othmane Mounjid |
| Abstract: | This paper is split in three parts: first we use labelled trade data to exhibit how market participants accept or not transactions via limit orders as a function of liquidity imbalance; then we develop a theoretical stochastic control framework to provide details on how one can exploit his knowledge on liquidity imbalance to control a limit order. We emphasis the exposure to adverse selection, of paramount importance for limit orders. For a participant buying using a limit order: if the price has chances to go down the probability to be filled is high but it is better to wait a little more before the trade to obtain a better price. In a third part we show how the added value of exploiting a knowledge on liquidity imbalance is eroded by latency: being able to predict future liquidity consuming flows is of less use if you have not enough time to cancel and reinsert your limit orders. There is thus a rational for market makers to be as fast as possible as a protection to adverse selection. Thanks to our optimal framework we can measure the added value of latency to limit orders placement. To authors' knowledge this paper is the first to make the connection between empirical evidences, a stochastic framework for limit orders including adverse selection, and the cost of latency. Our work is a first stone to shed light on the roles of latency and adverse selection for limit order placement, within an accurate stochastic control framework. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1610.00261&r=mst |
| By: | André Scholz (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Daniel Schubert (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Gerhard Wäscher (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | In manual picker-to-parts order picking systems of the kind considered in this article, human operators (order pickers) walk or ride through the warehouse, retrieving items from their storage location in order to satisfy a given demand specified by customer orders. Each customer order is characterized by a certain due date until which all requested items included in the order are to be retrieved and brought to the depot. For the actual picking process, customer orders may be grouped (batched) into more substantial picking orders (batches). The items of a picking order are then collected on a picker tour through the warehouse. Thus, the picking process of each customer order in the batch is only completed when the picker returns to the depot after the last item of the batch has been picked. Whether and to which extend due dates are violated (tardiness) depends on how the customer orders are batched, how the batches are assigned to order pickers, how the assigned batches are sequenced and how the pickers are routed through the warehouse. Existing literature has only treated special aspects of this problem (i.e. the batching problem or the routing problem) so far. In this paper, for the first time, an approach is proposed which considers all aspects simultaneously. A mathematical model of the problem is introduced that allows for solving small problem instances in reasonable computing times. For larger instances, a variable neighborhood descent (VND) algorithm is presented which includes various neighborhood structures regarding the batching and sequencing problem. Furthermore, two sophisticated routing algorithms are integrated into the VND algorithm. By means of numerical experiments, it is shown that this algorithm provides solutions of excellent quality. |
| Keywords: | Order Picking, Order Batching, Batch Sequencing, Picker Routing, Traveling Salesman, Variable Neighborhood Descent |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:160005&r=mst |